Buydown
Options
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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