Temporary Buy Down - 4/24/2016
There is an infrequently-used mortgage program available that could be the
solution to a buyer's or seller's problem.
A temporary buydown is fixed rate mortgage that the seller has prepaid
interest at closing to lower the payments for a number of years. The
borrower must qualify at the note rate but gets the benefit of lower payments
for the early years.
A 2/1 is a common buydown that the first year's payment is calculated at 2%
lower than the note rate and the second year's payment is calculated at 1% lower
than the note rate. The third through thirtieth years' payments are the
Let's set the scene. A buyer is using their available cash for down
payment and closing costs to get into the home. They'd like to put their
own touches on the home when they move in but may not be able to for a year or
two since most of their cash was used.
In this example, a $250,000 home is purchased with a 3.5% down payment and a
4% mortgage for 30-years. Normally, the principal and interest payment
would be $1,151.76 for the full 30-year term. If the seller will pay the
lender $4,736 at closing, it can be applied to pre-pay part of the interest for
the first two years.
The first year, the buyer's P&I payment will be $891.71 for 12 months based
on a 2% interest rate or 2% lower than the 4% note rate. It is $260.06
lower per month in the first year. The second year, the buyer's P&I
payment will be $1,017.12 for the next 12 months based on a 3% interest rate or
1% lower than the 4% note rate. It is $134.64 lower per month in the
A bonus for the buyer will be that the cost of the buydown paid at closing by
the seller becomes prepaid interest that is deductible by the buyer in the year
of purchase. The buyer gets lower than normal payments for the first two
years and a sizable tax deduction.
This type of program can be very beneficial to a seller who wants to offer
terms to improve the marketability of their home rather than lower the price.
The challenge will be explaining it to not only potential buyers but even agents
who are not familiar with this program.