Interest Rate Buydowns
The most common buydown is the 2-1 buydown. In the past, for
a buyer to secure a 2-1 buydown they would pay 3 points above
current market points in order to pay a below market interest
rate during the first two years of the loan. At the end of
the two years they would then pay the old market rate for
the remaining term.
As an example, if the current market rate for a conforming
fixed rate loan is 8.5% at a cost of 1.5 points, the buydown
gives the borrower a first year rate of 6.50%, a second year
rate of 7.50% and a third through 30th year rate of 8.50% and
the cost would be 4.5 points. Buydown were usually paid for
by a transferring company because of the high points associated
with them.
In today's market, mortgage companies have designed variations
of the old buydowns rather than charge higher points to the
buyer in the beginning they increase the note rate to cover
their yields in the later years.
As an example, if the current rate for a conforming fixed
rate loan is 8.50% at a cost of 1.5 points, the buydown would
give the buyer a first year rate of 7.25%, a second year rate
of 8.25% and a third through 30th year rate of 9.25% , or a
three-quarter point higher note rate than the current market
and the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works much
in the same ways as the 2-1 buydown, with the exception of
the starting interest rate being 3% below the note rate. Another
variation is the flex-fixed buydown programs that increase
at six month interval rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of
1.5 points, the first six months rate would be 7.50%, the second
six months the rate would be 8.00%, the next six months rate
would be 8.50%, the next six months rate would be 9.00%, the
next six months the rate would be 9.50% and at the 37th month
the rate would reach the note rate of 9.875% and would remain
there for the remainder of the term. A comparable jumbo 30
year fixed at 1.5 points would be 8.875%.
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