October 22nd, 2014 4:17 PM by Dale DiGennaro
Temporary Buydowns
Custom Lending Group, Inc. is excited to announce the introduction of temporary buydown options on many of our conforming and government fixed rate products for purchase loans.* Our expertise is not limited to the processing and underwriting of a loan, but helping you identify opportunities to save money.
What is a Temporary Buydown?
A buydown allows a borrower to obtain a lower interest rate, for a period of time, by prepaying some of the interest on the loan. Typically, the builder or seller of a property provides a lump sum concession (prepaid interest) at closing that is held in a custodial escrow account and applied each month to the borrower’s subsidized payment. The borrower may pay all or a portion of the buydown amount as well**.
Custom Lending has two buydown options; a 2/1 and a 1/0. In a 2/1 buydown, the borrower’s payment is calculated 2% below the note rate for the first year (example below). In the second year, the payment is calculated 1% below the note rate. After the first two years, the payment is calculated at the note rate through the remaining term of the loan. The difference between the borrower’s payment and the full payment is funded out of the custodial escrow account.
Loan Amount: $100,000
Loan Type: 30-YR Fixed Rate
Buydown Type: 2/1
Interest Rate: 5%; 5.18% APR
P&I Payment: $537
Interest Rate
Pmt
Monthly Difference
Annual Difference
Year 1
3% (5% - 2%)
$422
$115 ($537 - $422)
$1,380
Year 2
4% (5% - 1%)
$477
$60 ($537 - $477)
$720
Years 3-30
5% (no buydown )
$537
$0
Amount Required at Closing
$2,100
Why a Temporary Buydown?
There are several advantages to using a Temporary Buydown – advantages for the homebuyer, the Realtor and the Builder.
Homebuyers have the benefit of a lower payment for the first couple of years. Temporary buydowns are a good fit for borrowers who have the capacity for higher earnings within a few years of obtaining a mortgage.
Builders increase their market potential and move inventory more quickly by offering borrowers lower initial payments. It also maintains price integrity for their other inventory in the same development. A builder would much rather fund a temporary buydown, than drop the sales price by a couple of thousand dollars. If the builder drops the price to sell a home, they impact the sales prices of their other homes in the development.
Realtors benefit from a seller/builder funded buydown by moving a property more quickly while preserving the sales price and their commission.
Dale DiGennaro
President
Custom Lending Group