This Week's Blog

Please read the blog titled "What is a temporary buydown and why is it beneficial?" to get a better understanding of the buydown product prior to reading this entry.

With DNJ Mortgage's temporary buydown products, we are prepaying the difference in interest between the note rate and the interest rate the first two years.  That prepaid interest is held in an escrow account by the lender.  Each month that you make a payment, the difference in interest for that month is deducted from the escrow account.  Since the goal with this product is principal reduction, you want to make as few payments as the lender allows and then refinance.  Typically the number of months varies from 4-6.

When we redo the loan, the amount that is left in the escrow account is applied as a credit towards your payoff.  This is a direct principal reduction credit. 

Here is a real analysis that I had put together for a customer of mine.  This should illustrate the power of this program.

Proposed Mortgage Structure (30 yr fixed with two year temporary buydown):

1st mortgage loan amount: $417,000

Interest rate for first year: 5.25%

Monthly payment: $2302.69

Monthly savings from current loan payment: $231.05

How it works:

With this program, we (DNJ Mortgage) are prepaying the difference in interest for the first two years between the note rate of 7.25% and the buydown rates. The first year the buydown rate is 5.25% and the second year, the rate is 6.25%. The total amount of interest we would be prepaying is $9829.44 and this amount is held in escrow by the bank.

Each month a payment is made, the difference between the payment at 5.25% and the 7.25% note rate is deducted from the escrow account. The amount deducted each month is $541.99. Since the ultimate goal with this program is the principal reduction, we would want the least amount deducted from the escrow account as possible. The bank requires that 4 payments be made which would leave you a total of $7661.48 if you were to refinance after the 4th payment. You would receive a credit on your payoff of $7661.48 which is applied directly to principal. That combined with your monthly savings would give you a total savings of $8585.68 for 4 months. We can redo this every 4-6 months to have the greatest principal reduction and lowering your effective interest rate tremendously.

Your total principal reduction in 4 months if you maintain your existing loan is $1633.66. In comparison, with this loan your total principal reduction would be $9587.48.

As you can see with this example, there is a tremendous amount of principal reduction in 4 short months.  It would've taken this customer 27 months to pay down their principal this amount.  This program drops your effective interest rate tremendously due to the interest savings over the course of the loan.

I understand that some of you might look at the 7.25% note rate and be fearful of that or consider it a greater risk.  As I explained in my initial blog on the buydown program, we can use this program as a hedge against higher rates because the initial rate on this program is about 1% below market rate.  Also, you are only in the program a short period (4-6 months).  If we see rates starting to trend one way or another, we can get into a lower fixed rate when you refinance.  Also, if you desired, you could use all or a portion of the credit towards a permanent buydown and get a fixed product below market for the entire term.

Please feel free to contact me at 919-459-6507 or cari@dnjmortgage.com for additional questions.