When it comes to securing a mortgage, the myriad of options available to borrowers can be overwhelming. One often overlooked tool in the mortgage toolbox is the "temporary buydown." While this financing option may not be as common as fixed-rate or adjustable-rate mortgages, it can be an excellent choice for certain borrowers. Here's a closer look at temporary buydowns and how they might benefit potential homebuyers.

What is a Temporary Buydown?

A temporary buydown is a mortgage feature that allows borrowers to pay a lower interest rate initially, which then steps up to a higher rate over a specified period, usually one to three years. In essence, a borrower "buys down" the interest rate for the first few years of the mortgage.

For example, on a 3-2-1 buydown, the interest rate might be reduced by 3% below the note rate in the first year, 2% in the second year, and 1% in the third year. After the third year, the interest rate would revert to the original note rate for the remainder of the loan term.

How Does It Work?

To facilitate a temporary buydown, the borrower or a third party (often the home seller or builder) deposits money into an escrow account. This account is used to subsidize the monthly payments during the initial phase of the mortgage, thereby reducing the interest rate. Once the escrow funds are exhausted, the borrower's monthly payments adjust to cover the full note rate.

Why Consider a Temporary Buydown?

1. Initial Lower Monthly Payments: The primary advantage of a temporary buydown is the reduced monthly payment during the initial period. This can be especially helpful for borrowers who anticipate a higher income in the near future but need more affordable payments now.
2. Flexibility: For homebuyers who are transitioning between jobs or expecting a significant raise, a temporary buydown can provide the flexibility needed during that period of financial adjustment.
3. Seller or Builder Incentives: In a buyer's market, sellers or builders might offer a temporary buydown as an incentive to encourage a sale. This can be an attractive proposition for buyers looking to maximize their purchasing power.

Useful Tips

I want to buy a home? Where do I start?

Congratulations!  We are so happy to help guide you through the home buying process.  Here are the steps to buying a home:

1. Get ready. This includes getting your finances in order, understanding the home buying process, and finding a real estate agent.
2. Get pre-approved for a mortgage. This will give you an idea of how much you can afford and make you a more attractive buyer.
3. Start house hunting. Work with your real estate agent to find homes that fit your needs and budget.
4. Make an offer. Your real estate agent will help you negotiate the price and terms of the sale.
5. Get a home inspection. This is an important step to make sure there are no major problems with the property.
6. Close on the house. This is the final step in the home buying process, where you will sign all the paperwork and take possession of your new home.

Here are some additional tips for buying a home:

• Be patient. The home buying process can take time, so don't get discouraged if you don't find the perfect home right away.
• Be prepared to compromise. You may not be able to find a home that has everything you want, so be prepared to compromise on some things.
• Don't be afraid to ask questions. Your real estate agent is there to help you, so don't be afraid to ask them any questions you have about the home buying process.
• Do your research. Before you make an offer on a home, be sure to do your research on the neighborhood, the school district, and the property itself.
• Get everything in writing. Once you have made an offer on a home, be sure to get everything in writing, including the purchase price, the closing date, and any other terms of the sale.

Buying a home is a big decision, but it can also be a very rewarding one. By following these steps, you can make the process go as smoothly as possible.  Working with your mortgage professional at The Mortgage Place will help you realize your dream and reduce the buying stress!

The MIP is a fee that borrowers pay to the FHA to protect lenders in case the borrower defaults on their loan. The MIP is typically calculated as a percentage of the loan amount and is paid annually in monthly installments. The amount of the MIP varies depending on the down payment and the term of the mortgage.

Under the new policy, the annual MIP for FHA-insured mortgages with a down payment of 3.5 % will decrease from 0.85 % to 0.55 % This is a significant reduction that will result in lower monthly mortgage payments for borrowers who qualify for an FHA loan. For example, a borrower with a $200,000 FHA loan with a 30-year term and an interest rate of 6.0% would save approximately $900 per year or $75 per month in MIP payments under the new policy.

Borrowers who already have an FHA-insured mortgage will not be eligible for the reduced MIP rate. However, borrowers who refinance their existing FHA-insured mortgage into a new FHA-insured mortgage that meets the above criteria may be eligible for the reduced MIP rate.

It's important to note that while the reduction in the MIP rate is good news for homebuyers, it does not change the other requirements for FHA loans, such as credit score and debt-to-income ratio.

Recent Articles

Harriet – a.k.a. my mom – used to preach to me, “Never put off until tomorrow what you can do today.”

She pulled out that old adage to nudge me to do something she wanted done now, but that I, in all honesty, didn’t really care to do – today or tomorrow, for that matter.

In contrast to her anti-procrastination advice, to avoid giving in to my request for something, she preferred “Good things come to those who wait.”

I didn’t really care for that little sermon on patience while I was growing up, and I’m not any more of a fan now that I am older. I especially don’t like it as advice – relative to saving for a 20% down payment – to young adults who want to be homebuyers.

The fact of the matter is that waiting to save a 20% down payment can very likely cost prospective homebuyers.

As mortgage professionals, we must help counter this misinformed idea. Let consumers know – especially those looking to buy their first home – that waiting to save up 20% is not the only option, and they may be better off buying a home today with a smaller down payment rather than waiting.

And we just created a tool to help you illustrate that point.

Our new Buy Now vs. Wait calculator provides a detailed comparison so consumers can understand their options.

The Buy Now vs. Wait calculation begins with some basic information: current rent, monthly savings and credit quality.

Next, the calculator requests a desired home price, current down payment savings and an estimated interest rate.

Buy vs. Wait Example:

Let’s assume someone is saving for a 20% down payment on a $200,000 home. She has saved $10,000 of the $40,000 she needs for a 20% down payment and can add $500 to savings each month – $6,000 a year.

Our calculator will help her see she could buy a home with as little as 3% down, and the cost if she were to purchase today with 5% down (the amount she has available today).

It also shows that if home prices appreciate at 3% annually (the user can adjust that value), her future 20% down payment will need to be $48,552 and take her more than 6 years to save.

During that time, she will have paid more than $80,000 in rent while her home equity position would be more than $72,000 had she bought 6 years ago.

None of this is meant to encourage a prospective borrower from buying a home before they are ready. It is in everyone’s best interest for borrowers to succeed, so borrowers need to be comfortable not only with the mortgage payment but also the other responsibilities that come with homeownership.

However, many who want to own a home simply do not realize they can buy with less than 20% down  and many more have not stopped to consider that there is a cost to waiting.

We can help these would-be homebuyers by slightly modifying Harriet’s words of wisdom: Never put off until tomorrow what you can actually afford today.

Credit : MGIC Mortgage Insurance

Useful Tips

Federal Housing Administration announces significant decrease in mortgage insurance premium for certain FHA-insured mortgages

On February 1st, 2023, the Federal Housing Administration (FHA) announced a decrease in the annual mortgage insurance premium (MIP) for certain FHA-insured mortgages. This is great news for homebuyers, as it will lower their monthly mortgage payments and make homeownership more affordable.

The MIP is a fee that borrowers pay to the FHA to protect lenders in case the borrower defaults on their loan. The MIP is typically calculated as a percentage of the loan amount and is paid annually in monthly installments. The amount of the MIP varies depending on the down payment and the term of the mortgage.

Under the new policy, the annual MIP for FHA-insured mortgages with a down payment of 3.5 % will decrease from 0.85 % to 0.55 % This is a significant reduction that will result in lower monthly mortgage payments for borrowers who qualify for an FHA loan. For example, a borrower with a $200,000 FHA loan with a 30-year term and an interest rate of 6.0% would save approximately $900 per year or $75 per month in MIP payments under the new policy.

Borrowers who already have an FHA-insured mortgage will not be eligible for the reduced MIP rate. However, borrowers who refinance their existing FHA-insured mortgage into a new FHA-insured mortgage that meets the above criteria may be eligible for the reduced MIP rate.

It's important to note that while the reduction in the MIP rate is good news for homebuyers, it does not change the other requirements for FHA loans, such as credit score and debt-to-income ratio.

Recent Articles