Affordability is challenging for many home buyers with a typical mortgage payment 27% higher than last year at this time. A solution to this challenge is available with some high level understanding of alternatives for lowering monthly payments during these inflationary times.
Historically we’ve managed through times of rising rates with mortgage programs incorporating rate buydown and adjustable rate mortgages. Get creative with these financially savvy options.
What Are Rate Buydowns?
Rate buydown mortgage loans come in two forms, temporary and permanent.
- A permanent buydown is paid up front in the form of points and offers the borrower a rate below current market for the life of loan.
- A temporary buydown provides a significantly lower interest rate for a one or two year period, then adjusts to the fixed note rate for the remaining term of the loan.
Temporary Buydowns
Temporary buydown funds appropriated to cover the rate spread over the designated term are placed in escrow and paid out monthly. Should rates drop or the borrower refinance or sell the property the buydown term, those funds held in escrow are applied directly to principal upon loan payoff.
Power Buydown example: A 30 year loan carrying a 6% note rate would be reduced to 4% year one, increase to 5% for year two and adjust to the note rate of 6% years 3 through 30.
The Benefit for Sellers and Realtors
Fairway’s Power Buydown option is a cost effective temporary rate buydown helping buyers purchase today with lower monthly commitments. For sellers, it provides a way to differentiate their property by building the buydown into their price and positioning their home as a lower cost option in the short-term.
In areas where markets have slowed, using a seller paid buydown can save the seller significant cash over a price reduction and create a win-win for both seller and buyer.
Fairway’s Power Buydown Highlights
- Perfect for borrowers seeking a short-term lower monthly mortgage payment
- Sellers evaluating a price reduction or seeking to differentiate their property
- Excellent sales tool for a savvy real estate professional to market a home with an introductory low rate
- Creates financial space for a borrower to add light property improvements post sale
- Borrower must qualify for the note rate
- Can be buyer or seller paid though typically used as a seller paid incentive
- Buydown escrow funds will be applied directly to principal should the buyer refinance inside 2 years
Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) are often misunderstood and even feared. In times of rising rates these are an excellent tool to reduce monthly payments. The largest misconception surrounding ARMs in a market of rising interest rates is the unwarranted concern the note rate could exceed that of market fixed rates in a short period of time. On the contrary, most adjustable rate mortgages have a fixed term and then adjust with the market at set intervals, usually 6 months.
ARM Highlights
- Fixed for designated term, usually 5,7 or 10 years
- Often .50% or more lower rate than prevailing fixed rates
- Perfect if a move or a refinance inside of 5-7 years is anticipated
- Offers significant monthly savings up front
- Can be refinanced to fixed rate in the future without penalty
- Can be paired with a permanent buy down
Given the average borrower holds a mortgage loan for 5-7 years before refinancing or selling the property, let’s make dreams affordable today!
Fairway is licensed in all 50 states managing underwriting in-house to expedite loan processing and work through unique qualifying challenges that may arise. Offering a full suite of loan programs, let our team of experts take the guess work out of how to finance a property.
by Steve Landis for The Landis Group
