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Mortgage Buydowns: What They Mean for Combating Interest Rates

We wanted to talk through a hot, new, housing market trend called Mortgage Buydowns.A “mortgage buydown” is a financing agreement where the buyer, seller, or builder will pay mortgage points, also known as discount points, at closing to obtain a lower interest rate for a limited duration. This one-time fee will cover the difference between the standard rate and the new rate.

This is a great way for homebuyers in this market to combat higher interest rates!

Amidst rumors of an impending housing market crash, what do these mean for aspiring home-buyers?

Mortgage buydowns are a sort of concession for home sellers looking to sweeten the deal for their potential buyers. In essence, a buydown works by allowing a seller, homebuilder, or even mortgage lender to pay cash upfront in order to temporarily lower the mortgage rates that buyers pay.

For example, a 2-1 buydown will lower a buyer’s mortgage rate by 2 percentage points from its permanent rate (market rate) for the first year, and then 1 percentage point lower for year two, before reverting back to its long-term rate.

The benefit here is clear: buyers get to enjoy a lower-interest mortgage for a few years, and sellers have a way to sweeten the deal to get the property off the market. Lower monthly payments for a few years at the start of a mortgage can come as a saving grace for hopeful homebuyers concerned over initial payments.

As 30-year fixed-rate mortgages have climbed from 3 percentage points during the pandemic to their current 6.5% level, the volume of buydowns has skyrocketed. As a result, attraction to buydowns has surged as a way to offset the shock of higher lending rates. While typically a practice reserved for homebuilders, elevated mortgages have pushed buydowns into the resale market.

A buydown is NOT the same as an adjustable-rate mortgage (ARM), in which the rate is fixed for a set period of time before adjusting to a variable rate. An ARM, for example, has a fixed rate for the first five years, with the rate adjusting annually each year after that, based on the performance of an underlying benchmark rate.

In short, they are different in the fact that a buydown temporarily lowers the buyer’s mortgage rate, thanks to cash already paid by the builder or seller, whereas an ARM has an ever-changing mortgage rate throughout the duration of the loan.

If you have any more questions on how mortgage buydowns could potentially benefit you, please give us a call today!

Hutch & Howard


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