If you’re currently in the market for a new home, you may have found yourself wondering if it’s the right time to buy. After all, both home prices and interest rates remain high. If this situation describes you, there’s good news. There are several little-known mortgage options that can help ease the financial burden of the monthly payment, one of them being the temporary buy-down.
A temporary buy-down reduces the interest rate associated with your loan for a period of one to three years. This temporary interest rate reduction is designed to buy the homeowner time as they wait for market interest rates to decrease, allowing them to refinance when interest rates make the monthly payment more palatable.
Here’s an example of how temporary buy-downs are used, with some numbers and analysis to illustrate the concept:
Janet and Rick’s family is growing, and they need to upgrade from a one-bedroom home to a two-bedroom home. They suspect that interest rates may decrease in the coming months, but they aren’t in a position to wait for interest rates to drop before they begin shopping.
The couple is feeling nervous as they’re being quoted an interest rate of 7% and the associate payment would really stretch their budget. Instead of waiting for interest rates to decrease, Janet and Rick decide to make an offer on a new $500,000 home, which will leave them with a $450,000 loan, but the plan to ask the seller to pay for a 3-2-1 buy-down. The buy-down will allow them three years of reduced interest rates as they wait for market interest rates to decrease.
The 3-2-1 buy down will reduce the interest in the first year by 3%, the second year by 2%, and the third year by 1%. Since the market interest rate listed in this example is 7%, this means that in Year 1 the couple will receive a 4% interest rate, in Year 2 the couple will receive a 5% interest rate, and in Year 3 the couple will receive a 6% interest rate. Combining all three years, Janet and Rick will save almost $21,000 through reduced interest rates!
To further play out this scenario, let’s fast forward a year and say that market interest rates have now decreased to 5.50%. In this case, Janet and Rick decide that it’s a good time to refinance their loan and lock in that 5.50% interest rate permanently. As such, they complete their refinance and enjoy a much more palatable interest rate over the course of their occupancy of their home. Looking back at our scenario, the use of a temporary buy-down here worked quite well.
The couple never made a payment on an interest rate over 5% on their original loan and are now going to be making payments on a 5.50% interest rate. This means that the temporary buy-down effectively nullified the fact that their original mortgage had a 7% interest rate associated with it — as they were able to completely avoid making those higher 7% payments.
If you think a temporary buy-down fee may be useful to you, or you’re just curious and want more information, your local Alpine Bank mortgage lender is happy to be of service.
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