Monday Market Update: Terminology Spotlight / Mortgage Buydowns

A changing market means changing strategies – and our terminology spotlight is about one concession that is making headlines this month: the mortgage buydown.

What Is It?

Realtor.com® defines a mortgage buydown as “upfront money, often paid by the home seller (builders and lenders can also front the cost), to ‘buy down’ the interest rate on the buyer’s loan for a period of time.” USA Today adds that this is also known as an interest rate concession and states that while “a majority of buydowns are negotiated between buyers and lenders, sellers and builders also can offer the concession to attract buyers without reducing the listing price.”

What Are The Benefits?

A mortgage buydown can help keep buyers in the market and can help a seller avoid extended time on the market. Buyers enjoy a lower monthly payment in the short-term while they wait for salaries to rise, interest rates to lower and can start building equity sooner rather than later. The ‘break’ in the mortgage payment also increases cash flow for buyer to fund home purchases like furniture, build a home emergency fund and manage repairs.

What Are Some Examples?

USA Today reports that the common types of buydowns are:

- The 1-0 buydown, in which the contract interest rate drops 1% for the first year of the loan.

- The 2-1 buydown, in which the rate drops 2% for the first year and 1% the second year before returning to the contract rate in the third year.

- The 3-2-1 buydown, in which the interest rate drops 3% the first year, 2% the second year and 1% the third year before returning to the contract rate in the fourth year.

Metro areas with the greatest share of mortgage buydowns are San Diego, Phoenix, Portland, Las Vegas and Denver – with 58% to 73% of home sales including a mortgage buydown.

What Are The Downsides?

A mortgage buydown is temporary and will expire. While not all lenders offer buydowns, those that do offer greatly varying terms. Ultimately, when the buydown ends the new payment can come as a shock to buyers. Understanding how long the buydown period lasts and what the payment will re-sent to is critical in utilizing this strategy to enter home ownership. Hopeful homeowners may plan to refinance after the buydown period, but there is no way of knowing if rates could be even higher then. Knowing the ’worst case’ payment after the buydown period is important to understanding the potential life of your monthly mortgage payments.

*Please note that this article is intended for informational purposes only and is not intended as mortgage advice or guidance. Be sure to consult with a licensed mortgage broker to fully educate and empower yourself on your options and opportunities in this market.

Resources Used:

The Pros and Cons of a Mortgage Buy-Down for Homebuyers, According to Loan Experts

Mortgage Rate Buydowns Are On The Rise As Homebuyers Cope With High Interest Rates

All my best,

Bobbi Decker
DRE#00607999

Broker Associate, Bobbi Decker & Associates
650.346.5352 cell
650.577.3127 efax
www.bobbidecker.com
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