What is a Mortgage Buy Down? part 2

Aug 1

How does a Mortgage Buydown work?

Temporary Buydown:

is when up-front funds are deposited into an escrow account to temporarily reduce the interest rate, and effective monthly mortgage payment for a specific period of time.

Permanent Buydown:

lasts for the entire loan term. With a permanent mortgage rate buydown, you pay a fee known as discount points to lower your interest rate for the life of your loan. You can purchase as little as 0.125 of a point or as much as 4 points, depending on the loan program.

Who Qualifies for a Mortgage Buydown?

Buydown agreement can have different requirements depending on the type of buydown and the entity involved.

Freddie Mac
Requires that the agreement state that the borrower is still responsible for making full monthly mortgage payments if the buydown funds are unavailable. The mortgage file must also include the seller's calculations for the total cost of the buydown, any contributions from other parties, and the annual increase in the borrower's monthly interest and principal payment.
Fannie Mae
Requires that the agreement state that the borrower is still responsible for making full monthly mortgage payments if the buydown funds are unavailable. The agreement may also include an option to return the funds to the borrower or lender if the mortgage is paid off before all the funds have been used. A copy of the agreement must be included in the mortgage's delivery documentation.

VA Home Loans
Requires that temporary buydowns last at least one year but no more than three years. The agreement should include the property address, the length of the buydown, the amount of the buydown, the original interest rate, the new interest rate, and who will hold the funds.

Who Pays for a Mortgage Buydown?

Either the buyer, seller, builder, or lender can pay for buydowns.

Buyers can pay a lower rate for a few years or for the entire life of the loan, depending on the buydown.
When sellers or builders are motivated, they may be willing to pick up the fees involved with your permanent or temporary buydown. Seller concessions toward closing costs have been popular in creating one more reason why this could be the ideal time to buy a home.
A lender may pay for a temporary buydown to help borrowers get access to lower initial payments and the stability of predictable payment increases. The lender compensates the difference between the standard note rate payment and the reduced buydown payment.

The cost of a buydown depends on several factors, including the interest rate, loan amount, loan term, and buydown structure.