Let's Discuss Buydowns
In a market with high-interest rates, buydowns can be a valuable strategy for selling homes. If you're new to the concept or have questions, let's explore buydowns. Of course, always consult a trusted lender to learn more about your personal situation.
Permanent Buydowns Explained:
What They Are: Known as points, origination fees, discount points, or lender fees, these payments reduce a borrower’s interest rate permanently.
How They Work: By compensating the lender upfront for the lost commission from selling a loan at a lower interest rate, these costs are borne by the buyer or the seller.
Our Take: Many lenders recommend that buyers avoid paying for permanent buydowns and try a different approach.
Temporary Buydowns Clarified:
Definition: Temporary buydowns involve an escrow account set up for the buyer, with no fees going to the lender. Sellers frequently fund this account to make their listing more desirable.
Operation: Take a borrower with a $500,000 loan at a 7% rate and a 3-2-1 buydown:
Year 1: Buyer pays $2,387/month; the escrow account covers $939/month.
Years 2 & 3: Buyer’s payments increase, and escrow covers less.
Advantage: Refinancing in the 13th month means leftover funds in the escrow account reduce the principal balance.
Core Point: All the money benefits the buyer; none goes to the lender.
Considerations:
Risk: Buyers might focus only on the low initial payment and not account for future higher payments.
Strategy: Require buyers to qualify at the highest payment level to ensure they can manage future payments. This method allows time for wage increases and potential rate drops, facilitating refinancing without losing benefits.
Need More Information?
If you’d like to learn more about the value of buydowns in the home purchase process, let’s talk.
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