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There is SO much hype in the news media and social media platforms about the real estate market. As we know fear sells and that what these folks are sending our way 24/7. The reality is that people still need to move forward with their lives and buy or sell their homes based on what’s going on in their lives right now. As an example; I bought my first house during a recession at a 7.75% interest rate. I couldn’t wait for interest rates to come down. I had the down payment and a good credit rating. My daughter was aging into a different school so it was the best time to move based on my child’s needs. I got an ARM (adjustable rate mortgage) and enjoyed that home while my daughter finished elementary and high school. I did great financially later on when I sold the home. It provided me with real net worth above and beyond my savings. Home buyers need to take a deep breath and focus on their needs and separate that from the hype we hear 24/7 on all media platforms.
Fortunately, there are several financing options when you’re buying a home, like ARMs, down-payment assistance programs and paying down points. Now there’s a new option called a temporary buydown. Today I’m introducing the Rate Reduce* Temporary Buydown program offered by our mortgage partners, GRA (Guaranteed Rate Affinity).
TEMPORARY BUYDOWN DEFINITION
A Temporary Buydown reduces your interest rate on your mortgage for the first, second or even third year of your loan depending on the program. The seller can contribute to your loan to lower the rate during the initial period, and then payments go back up after that initial period is over. The most common is called a 2-1 buydown.
How Rate Reduce works:
In order to get a Temporary Buydown through Rate Reduce, the seller of the home has to offer to fund it. In the case of new construction, the builder can offer to fund the buydown. It needs to be included in the purchase contract as a seller concession. The amount of money that the seller or builder is pre-paying for the buydown, normally called the concession, is paid during closing and kept in an escrow account.
You’ll need to work with a real estate professional to negotiate the details between all the parties. The amount paid by the seller or builder depends on the price of the home and the length of the program and is usually calculated as a percentage of the purchase price.
Offering 5 different types of Buydown
GRA offers five types of Temporary Buydowns through Rate Reduce. The most common is called a 2-1 buydown, but there’s also a 3-2-1 buydown, 1-1-1 buydown, 1-0 buydown and 1.5-0.5 buydown. They all offer a period of time with a lower rate and work similarly. You’ll notice that their names correspond with the periods of lower rates—so a 3-2-1 Buydown offers a 3% lower rate for 1 year, a 2% lower rate in the second year and a 1% lower rate in the third year before the rest of the mortgage reverts to its original rate, and so on.
3-2-1 Buydown
- 3% Lower Year 1, 2% Lower Year 2 & 1% Lower Year 3
- Fixed at Note Rate years 4-30
- At 6.875%, the buydown contribution is about 4.5%
2-1 Buydown
- 2% Lower Year 1 & 1% Lower Year 2
- Fixed at Note Rate years 3-30
- At 6.875%, the buydown contribution is about 2.2%
1-1-1 Buydown
- 1% Lower Years 1-3
- Fixed at Note Rate years 4-30
- At 6.875%, the buydown contribution is about 2.3%
1-0 Buydown
- 1% Lower than Note Rate Year 1
- Fixed at Note Rate years 2-30
- At 6.875%, the buydown contribution is about .75%
1.5-.5 Buydown
- 1.5% Lower Year 1 and .5% Year 2
- Fixed at Note Rate years 3-30
- At 6.875%, the buydown contribution is about 1.5%
How a 2-1 Buydown works
Let’s take a look at an example of how this would work with a 2-1 Buydown.
Let’s say you find a home and agree to a purchase price of $500,000, and you pay 20% in down payment. Your loan would be $400,000. For the sake of this example, let’s say you qualify for a mortgage rate of 6.875%.
| Years | Effective rate | Monthly payment* | Monthly contribution | Yearly contribution |
| 1 | 4.875% | $2116.83 | $510.89 | $6130.68 |
| 2 | 5.875% | $2366.15 | $261.57 | $3138.84 |
| 3-30 | 6.875% | $2627.72 | $0 | $0 |
*Monthly payment includes principal and interest, not taxes, insurance or other expenses. Sample loan scenarios do not include advertised rates, are provided for illustration purposes only and are not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate Affinity cannot predict where rates will be in the future.
The total buydown contribution that the seller or the builder would offer is $9,269.52 in this example.
Temporary Buydown pros and cons
You’re probably asking yourself, why would a seller offer to pay to help you get charged less on your mortgage? Well, it depends on the conditions in the local housing market. If a seller needs to sell, but there aren’t enough buyers able to afford the monthly payments on the house due to current mortgage rates, a Temporary Buydown can help close the deal.
In addition, it’s a great alternative to cutting the asking price of the home. This way, a seller can help make the buyer’s monthly budget work while still getting a full price offer. Funding a buydown contribution could potentially be less costly than what they would have taken off the price of the home.
The benefits to a buyer are pretty apparent:
- Ease into homeownership and the monthly payment knowing they’ll likely be able to afford a bit more each year
- A low-rate bridge to the future, when rates may be lower and it makes sense to refinance
- More money to handle the initial expenses that come with moving into a new home.
It’s important to remember that a Temporary Buydown is just that—temporary. After a year, the monthly expenses go up, and again the year after that for homeowners with a 2-1 or 1.5-0.5 buydown. Of course, after you close on the home, you can keep an eye on the mortgage rates and refinance when interest come down which is a normal part of our business and economic cycles here in the United States.
Now’s a great time for Rate Reduce
With rates higher this year than last year and demand for homes remaining strong here in Florida; you should look into every option you can find to lower your monthly payment when you are ready to buy. Rate Reduce may be the perfect solution for a buyer and a seller, so it’s worth asking for it as part of your negotiation. Contact me for more info about buying and selling homes here on the Treasure Coast. Vivian Caylor-Coldwell Banker Realtor – Stuart, FL
Now’s a great time for Rate Reduce
With rates much higher this year than last year, and home prices remaining near an all-time high, you should look into every option you can find to lower your monthly payment. Rate Reduce may be the perfect solution for a buyer and a seller, so it’s worth asking for it as part of your negotiation.
