Temporary buydown programs are allowed by many loans.
A temporary buydown is a reduction in the interest rate you pay on your loan for a stated period of time. A temporary buydown may allow you to qualify for more home as you are qualified on the temporary buydown rate. As always, compare ALL temporary buydown costs before you select your lender. Email me with any temporary buydown questions
For example, a seller might offer to provide the buyer of of his home funds for a "2-1 temporary buydown." If the interest rate which the borrower agrees to pay on his or her fixed rate mortgage note at closing is 7.50%, then a 2-1 temporary buydown will mean that the borrower will actually make monthly payments for the first 12 months at 2% below this "note rate," or at 5.50% in this example. For the following 12 months, payments would be due at 6.50%, or 1% below the note rate. At the end of 24 months, the borrower would make payments at the note rate of interest, 7.50%, for the remainder of the loan.
Again, a 2-1 Temporary Buydown offered on a 7.50% loan, would mean that payments are
made as follows:
The builder will pay a sum to the lender, in this example, equal to the amount of money the lender is not receiving from the borrower in interest in order to "fund" the temporary buydown. In the above example, this would be enough money to supplement the interest difference between the payment at 5.50% and 6.50% and the actual payment due at 7.50%. The lender will inform the borrower of the exact amount due in monthly payments on the mortgage loan throughout this process.
Sometimes, it is the lender, not a builder or other third party, who is providing the temporary buydown to the borrower. For more information, see the page on the ARM Alternative Temporary Buydown.
I have included a page on how to calculate your Temporary buydown qualification ratios.
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