This Week's Blog

There are two types of buydown programs: temporary and permanent. 

A permanent buydown is where the borrower or seller pays discount points to the lender to have a lower interest rate for the term of the loan.  Often a permanent buydown does not make financial sense due to the amount of time needed in that loan to recoup the costs of the buydown.

A temporary buydown is where the borrower, seller, or lender pre-pays interest for the first one to three years in order to have a lower interest rate.  The most common types of temporary buydowns are:

• 3-2-1 buydown
• 2-1 buydown
• 1-0 buydown

With a 3-2-1 buydown...if your note rate is 6.5%, for the first year your interest rate would be 3.5%, 4.5% the second year, 5.5% the third year and 6.5% years four through thirty.

With a 2-1 buydown...if your note rate if 6.5%, for the first year your interest rate would be 4.5%, 5.5% the second year and 6.5% for the remaining years in the term.

With a 1-0 buydown...if your note rate is 6.5%, you would have an interest rate of 5.5% for the first year and 6.5% years two through thirty.

Temporary buydowns have been most commonly used by sellers/ builders that are trying to entice buyers with lower than market interest rates for the first few years resulting in a lower monthly mortgage payment.

Why temporary buydowns and the "No Closing Cost Loan" are perfect together?

If your loan amount is greater than $200,000, DNJ Mortgage has the ability to use the commission the bank pays us for originating the loan to pay for the buydown cost as well as closing costs.  This gives our customers a better than market interest rate at no cost to them.  We can continue to refinance at no cost using a buydown program to maintain the lower than market interest rate.

Example:

Customer has a current loan amount of $250,000 with an interest rate of 6.625% on a 30 yr fixed. Current monthly payment is $1600.78.

Based on current market conditions we are able to offer them a no closing cost rate of 6.5% with a one year buydown.  This gives them an interest rate of 5.5% for the first year and then the loan converts to a 30 yr fixed at 6.5% after the first year.  By refinancing at no cost, they received an interest savings of $2500 in just one year.  At the end of the year, they have three options:

1. Keep the loan and maintain the 6.5% interest rate.
2. Refinance again with no closing costs into another one year buydown.
3. Refinance with no closing costs into a different loan product (ARM, 15 yr fixed, etc).

As you can see, using the no closing cost loan along with a temporary buydown provides are customers with several benefits including:

• Lower than market interest rate at no cost them resulting in lower monthly payments.
• Increased interest savings
• A hedge against higher interest rates during periods of economic strength.

Please don't hesitate to contact me at cdecandia@lenderforlife.net for an analysis of whether a temporary buydown would be beneficial for you.