Temporary Buy Down

Most lenders offer Temporary Buy Down programs, which can help lower your payments on a purchase transaction over the short term.

These programs should be looked at as a Partial Adjustable Rate mortgage that has a feature that will eventually go to a fixed rate.

The way a temporary buy down works is that for a period of two years your mortgage interest rate will be much lower than the eventual fixed rate being offered on this home.

The buy down must be purchased by you or the seller on your behalf in order to qualify.  The buy down has a cost associated to it. 

For example, if you lock your rate at 6.5% and you have a 2/1 buy down in place, your first year interest rate will be 4.5% and the second year will be 5.5% and the years 3 through 30 will be set at 6.5%.

The benefit of a program like this is that the seller or builders will offer the incentive to you to qualify you for more home equity at the time of purchase.

Be CAUTIOUS of this program, but most of all, be aware of the negative aspects. Here are a select handful of them:

The interest rate offered in the buy down will typically start about .5% higher than the going rate in the market.  Therefore, you may have been able to lock in a rate better today than what your 30 year fixed rate will be at the end of the temporary buy down period.

Sellers and builders build in a margin to pay these premiums which ultimately means you pay the premiums for the buy down.

Although these premiums can qualify you at a lower rate, you should be cautious with the fact that you were unable to qualify for the loan under normal terms, because this could create payment issues for you in the future.  Keep in mind that on a 240K transaction your payment goes up about $200 a month each of the first two years; ultimately, there will be a $400 increase when your fixed rate applies.

Finally, the premium used to buy down the rate is simply paid in advance; in essence, you are not saving this money—you are simply paying it all upfront.  This upfront fee comes from you in the form of actual cost or higher purchase prices.

I strongly caution my clients from utilizing this feature and recommend that if the sellers and builders are willing to contribute these funds (and you are willing to accept a higher price in order to get these funds) then a simple interest rate buy down is recommended.  The difference is that it is not temporary, but is permanent, starting at Day One.  If the going rate is 6.0%, which is about .5% better than the temporary buy down rate, and the addition contributed funds are used for closing costs and permanent rate reduction, you may be able to get a fixed rate for 5.5% for the life of the loan; this will save you tens of thousands of dollars over the life of the loan.

Remember to educate yourself first and find someone who has your long term interests in mind to talk over these options.