With interest rates in the high 6% range, quite simply, you don't get as much for your money. 

 

But there is hope! It is called the 2-1 Temporary Buydown and has helped many buyers and sellers close escrow in this sluggish market.

 

What is a Temporary Buydown?

A temporary buydown is a mortgage option wherein the payment is reduced as the rate is “bought down” for the first year or two of the mortgage. For example, on a 2-1 buydown, the interest rate is 2% lower than the note rate the first year and 1% lower the second year.


The Buydown is typically funded by a seller or builder credit, also known as an Interested Party Contribution. Temporary buydowns have been around for years but fell out of fashion with the creative financing of the 2010s and the low-interest rates of the 2020s.

 

How Does It Work?

Once the note rate is set, a buydown cost is established by taking the payment at the note rate and subtracting the payment at the “bought down” rate.  We annualize this difference.  We do that for each year of the buydown and add these “costs” together.  This establishes the total buydown cost.

 

The buydown cost is typically paid by the seller or builder in the form of an Interested Party Contribution (IPC), i.e., a “seller credit.” The buyer may not pay for a Temporary Buydown. 

 

These funds are held in a custodial account by the lender and during the buydown period, the buyer pays at the lower “bought down” rate while the lender advances the difference between the bought down payment and full note payment to the servicer.

 

At the end of the buydown period, the borrower pays the remaining payments at the full note rate.

 

Here is an example of a 2-1 Buydown:

 

Sales Price: $750,000

Down Payment: 20%

Loan Amount: $600,000

Note Rate: 5.00%

Payment: $3,220.93

 

 

The amount required to fund the buydown is 1.68% of the sales price and meets the Interested Party Contribution maximum for all agencies. (IPC calculation: $12,573 ÷ $750,000 = 0.0168)

 

For more information, please contact Mike Wright directly at 714-536-2200 x 102 or email mwright@arborfg.com.