With the recent rise in interest rates, some buyers have put their house hunting on hold until they see rates coming down. However, with the instability of knowing what the Federal Government plans next, waiting might mean missing the perfect home. Instead of missing your opportunity to buy the home of your dreams, why not consider an Interest-Rate Buydown instead. This is a fantastic way to get the home you want at a mortgage rate you are willing to pay.
An interest-rate buydown is a tool to help you qualify for a larger loan and purchase a higher-priced house than you could under normal circumstances. A buydown allows you to pay extra (tax-deductible) points up front in return for a lower interest rate for the first few years. Often, people relocating for employment obtain buydowns because employers sometimes pay the extra points as part of a relocation package.
While the most common way of obtaining a buydown is by paying extra points up front, many mortgage companies now increase the note rate to cover the cost in later years. With our current market conditions, lenders have all types of programs to address a rate buydown.
The most common is the 2-1 buydown, which can cost 3 additional points above current market points. During the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.
Another option is the 3-2-1 buydown. This reduces the mortgage rate 3 percent the first year, 2 percent the second and 1 percent the third. Thereafter you pay the full rate.
Some programs are “flex-fixed” buydowns that increase interest at six-month intervals instead of annually. Whatever the scenario, it is worth the exploration so that you can get into the market with confidence and start your home search. Reach out to your Real Estate professional who can help you navigate through this process and partner you with a mortgage expert that can set up the ideal mortgage structure for your specific needs.