I began my real estate career in February of 1980 and by 1981 mortgages had peaked to a rate of 18% interest, the highest our country has ever seen.
I began my real estate career in February of 1980 and by 1981 mortgages had peaked to a rate of 18% interest, the highest our country has ever seen.
These record-high rates prohibited many from qualifying for a mortgage loan and that is why “seller financing” was a big thing back then.
For those that could qualify for a mortgage loan 18% was simply too high for the majority of Homebuyers to qualify for so many turned to mortgage rate “buy-downs” which allowed the Homebuyer to qualify for a lower mortgage rate.
What is a “Buy Down?
A mortgage rate buy-down is when a buyer elects to buy down whatever the current interest rate is. This gives the Homebuyer the ability to qualify for a home that they may not have qualified for if they had to pay the current mortgage rate being offered at the time.
Buy-downs are not only a smart option when rates are high. First-time Homebuyers may elect to buy-down a quoted mortgage rate just to be able to get into their first home.
Those buying their second or third home may elect to execute a buy-down when they can get into a home with lower payments and give themselves time to pay off debt like a car, boat or credit card payments.
The buy-down gives them time to pay off these debts before the interest rate escalates to the highest allowed rate.
The 2-1 Mortgage Buydown Program
A common buy-down program is known as a 2-1 buydown. Let’s say mortgage rates are currently 3.5%.
On a $200,000 loan with a base interest rate of 3.5% for 30 years the payment schedule would be as follows:
- The first year’s rate would 1.5% and the principal and monthly interest payment would be $690.24
- The second year’s rate would be 2.5% and the monthly principal and interest payment would be $790.24
- The third-year and remaining years the rate would be 3.5% and the monthly principal and interest payment would be $890.09
The 3-2-1 Mortgage Buydown Program
Another well down buy-down program is the 3-2-1 buydown program. Let’s say mortgage rates are currently 5.5%.
On a $300,000 loan with a base rate of 5.5% for 30 years the payment schedule would be as follows:
- The first year’s rate would be 2.5% and the monthly principal and interest payment would be $1,185.36
- The second year’s rate would be 3.5% and the monthly principal and interest payment would be $1,347.13
- The third-year rate would be 4.5% and the monthly principal and interest payment would be $1,520.06
- The fourth-year and remaining years the rate would be capped at 5.5% and the monthly principal and interest payment would be $1,703.37
Benefits of the Buydown Programs
Unlike “adjustable rate” mortgages that are tied to a national indicator and can escalate to a very high rate, Homebuyers like the security of knowing the buy-down programs all have a “cap rate”.
Whatever rate “note rate” your lender quoted you on your application is your maximum interest rate cannot exceed that rate.
Things to Consider
As mentioned above “buy-down” programs allow a Homebuyer to qualify at a lower rate that increases over the following 2-3 years. This is great for first-time Homebuyers that otherwise may not qualify to purchase a loan.
The caveat is that it is not wise to create a lot of debt knowing that your rate will be increasing. Try to be very conservative in your purchases and don’t put yourself in a position that you cannot afford the “cap rate’ of your loan which is the maximum rate you will be paying.
Those that are purchasing their second or third home also like the buydown program because they may have a car loan or boat loan, etc. that they will be paying off soon so a buy-down program allows them to buy a nicer home and they will be comfortable with the “cap rate” because they will have much of their debt paid off by the time the maximum “cap rate” takes effect.
The buy-down programs do have a fee and that fee is determined by the loan amount and the buyer’s credit. A good mortgage lender can quote you the cost for any buy-down program.
If you as a buyer can pay your own closing costs many times you can ask a seller to make a “concession” and pay a good portion of the cost to obtain a buy-down. I have great mortgage lenders and brokers on my team that can assist you with any questions you have regarding the buy-down programs or any other programs.
Questions? Contact George
George Tallabas
Associate Broker
RE/MAX Executives
208-880-2333/mobile
www.SearchIdahoHomes.com
