With any mortgage program, you can pay discount points to have a lower “starting point” (interest rate) for your mortgage. This process is called “Buying the Rate down” and is often referred to as a Permanent Buydown. Although the formula varies, one discount point might buy the rate down 1/8 of 1 percent – two points (using this example) could buy your interest rate down by 1/4%.
Another way to buy your rate down is called a Temporary Buydown. With this scenario, a lump sum of money is placed into an escrow account for you at closing. A portion of the money is then drawn out by the mortgage holder each month and added to your monthly payments. The most common program to use the Temporary Buydown with is the FHA Mortgage Loan.
If your fixed rate mortgage is at 4.5% (for instance); you might opt to put an amount equal to approximately 2.6% of the mortgage aside. By establishing this “savings account” you could make monthly payments your first year based on a 2.5% interest rate, and the second year at a 3.5% interest rate. As you make your 2.5% payment, the mortgage holder takes the money out of your “savings account” equal to the other 2% of interest and applies it to your 4.5% mortgage payment. This account would be drawn down to zero at the end of the two years, and the payments would be at 4.5% for the remainder of the loan.
So, with interest rates at 4 and 4.5% (or less) in 2012 – you might not think this is a program most people are talking about… and you’d be right. Traditionally, we use this program when mortgage interest rates are at 6.5% and higher. But if you are a student just graduating from college, or a couple who is getting married, and buying your first house – you might be in a situation where you have some additional “gift funds” that could be used to make a mortgage payment a little easier to handle those first few years!
Added Benefit?? While we are not Accountants (read: Check with your Tax Preparing Professional), we understand even though the Seller, or whoever, is paying this “buydown” on your behalf – you get to claim it on your taxes. It’s Pre-Paid Interest on a House… so an extra $4500 deduction, could be N-I-C-E!
Bottom line, a Temporary Buydown is most popular if a buyer has extra fund for closing costs. For instance, if the seller is willing to pay some of the costs, and your company is paying part of the cost for relocation – the additional funds could be applied to a temporary buydown. With this option, you make lower payments during the first years of the mortgage, without the uncertainty of an Adjustable Rate Mortgage (ARM).
If you have questions about how a Temporary Buydown (or a permanent buydown) might help you buy a house in Raleigh – call Steve and Eleanor Thorne 919 649 5058 – we have the best rates, and we help people every day who want to buy a home! It only takes 15 or 20 minutes to get pre-qualified!