What is a Mortgage Buydown?
Buyers and Sellers in Sun Valley, Ketchum, and Hailey, Idaho Should Take Note
Real estate in Hailey, Idaho is shifting and Sellers should consider ways to make their listings more attractive. Staging was pushed aside the past few years during our sellers market. Sellers should now consider staging their homes to sell and offer Buyer incentives to position their properties to sell for top dollar.
What is a Mortgage Buydown?
A Mortgage Buydown is when a Seller pays the Buyers’ lender cash to lower the Buyer’s mortgage rate by 1-3 points. Buydowns are a popular incentive provided by home builders to assist Buyers in their first few years in a new home. Several motivated sellers in Hailey, Idaho are currently offering buydowns as incentives to purchase real estate.
For Example: A 2/1 buydown effectively sets your mortgage rate at 2 percentage points lower than your permanent rate in the first year, 1 point lower in the second year, and then reverts to the permanent rate in year 3.
Are Buydowns New?
Mortgage buydowns have been around for a while and were used extensively in the 70’s when inflation and interest rates were high.
Buydown Pros?
- A buydown will temporarily reduce your interest rate, saving you money and lowering your monthly payments during the initial loan term.
- A buydown could make sense for homebuyers whose income will increase in the years to come.
Buydown Cons?
- Once the buydown rate ends, your monthly payment could be higher than expected.
- A buydown may not be an option for certain property types or loans.
- If your income doesn’t increase, then you could struggle with making monthly mortgage payments at the end of the buydown period.
Buydown Example
Say you are borrowing $500k with a 30-year fixed interest rate loan at 6.7%.
An estimated initial cost for this buydown would be $22k which is an attractive Seller Incentive.
A 3 year buydown would look like this:
- Year 1: $2316 monthly payment at 3.75%
- Year 2: $2608 monthly payment at 4.75%
- Year 3: $3244 monthly payment at 5.75%
- Year 4: $3244 monthly payment at 6.75%
Discuss Buydowns With a Local Lender
I recently discussed Buydown’s with local mortgage broker, LIndsay Zondage with Harris Mortgages of Idaho. Here is her insight on Buydowns for real estate in Hailey, Idaho.
If interest rates seem daunting, there are so many options to decrease a potential monthly mortgage payment. One of those options is a temporary rate buy down.
What is a Temporary Rate?
Temporary rate downs aren’t new, but they’re very popular currently. Essentially, if you purchase a home and your interest rate is 6% on a 30 year mortgage, a two year temporary Buydown means the first year of the loan, your rate is 4%. Year two is 5%, and year three- 30 will be 7%. The idea is that you’ll have either refinanced by year three or rates will be higher, in which case you’re still sitting pretty at 7%.
Sounds Good, What are the Caveats?
- The seller MUST pay for this via a seller credit. Your lender will be able to give you an exact number, but a rough estimate of the above scenario on a $400,000 loan would be $8,900. One option to sweeten the pot for a seller is to offer $8,900 more. Instead of offering $500,000 for a home, a buyer can offer $508,900 and request the seller participate in the buy down.
- Second, a buyer must qualify for the loan based on the higher interest rate.
- Third, this is available for most kinds of loans, including jumbos and second homes.
How Do I Learn More?
There are several different lengths for a buy down; you can do one, two, or three years. A good lender will be able to explain to you the costs and savings associated with any of those options.
Call us today to set up your first appointment in the Sun Valley area: (208) 721-4131.
