Interest rate buy down

[Chris_]

We are not in the market to buy a house as of right now.  I am just asking a general question because it seems as though interest rate buy downs have become a bit popular.  Or maybe they always have been.  I don't know.  We are losers stuck renting... probably until forever.  lol

The interest rate buy downs sound like a scam.  To me, it sounds like you're getting a deal, but in the long run... you're not.

Can someone explain these to me?  They just sound fishy.

An interest rate buy down can be easily understood in terms of a subsidy on a fixed mortgage made to the home purchaser on behalf of the seller. The subsidy is a fund that the seller contributes to an escrow account. This fund is used to help pay the loan during the first few years, thereby enabling the buyer to take advantage of a lower monthly payment. This lower payment assists the home buyer in qualifying more easily for the loan. Thus, a buy down appeals to borrowers who believe that they will be able to afford a larger home payment in several years, but are not yet ready to make monthly payments at the higher current mortgage rate. This finance plan provides an incentive for the borrower to purchase the property.

There are two types of buy down mortgages. A temporary buy down mortgage is one in which a payment is made to reduce the borrower's monthly payments during the first few years of a mortgage. After the first few years and for the remainder of the term, the borrower must pay the original note rate. A permanent buy down is an up-front payment that reduces the interest rate over the life time of a mortgage.

[Thor]

I might do a permanent buy down IF the terms were good along with the cost. It also depends on how many points (percentage rate) they are offering vs the cost. As far as a temporary buy down, THAT seems like a scam to me. I can only see grief in that person's future unless they are assured of promotions and a job for the length of the mortgage. (at least in today's market) IF a person intended on moving after the three year mark and that was a certainty, it MIGHT be a decent financial move. (a good example of that would be someone in the military)

[NHSparky]

Temp buydown is a scam.  Look at the APR more than the interest rate, particularly if you're looking at paying points to buy down the rate.  Also, if you don't know if you're going to be in the house for at least 7 years, probably not a good idea to pay points either.

debk can certainly expound on this far better than I.

I didn't pay points to buy down the rate, but then again, I got in at 5 3/4, 100 percent financing.  All I had to come up with were closing costs.

Of course, that was four years ago.  No chance of finding that kind of financing anymore.  I might get a lower rate by 1/2 percent, but the closing costs, PMI, etc., would now more than offset any savings in the mortgage.

[Chris_]

When we finally get a house, we plan to have $15,000-$20,000 down.  We want a 30 year FIXED mortgage.  No other junk.  We're too worried about scams.  I was looking at these temp buy downs as another housing market crash.  There is a girl I know who is bragging about her three year temp interest rate buy down.  I had NO idea what she was talking about, thought she was making shit up again.  Her & her husband wanted a house so badly, guess they took any route they could to get one.

I would never just jump into a home "just because" I was sick of renting.  I hate renting, but I wouldn't do anything for a house. 

[debk]

Reading the quote in the OP....

"temporary buydown"? Sounds like an ARM....wonder why it isn't just called that?

I don't know about the "subsidy" thing either....I don't know why a seller would be willing to be making up the difference in a buyer's mortgage payment for a couple of years "until the buyer can handle the higher payments". Certainly wouldn't happen with an FHA or VA loan....if the buyer can't qualify for the payments, they don't get the loan. The requirements have always been pretty strict, and those loans are very specific as to money coming anywhere other than the buyer's pockets.

Buying down interest points up front, can be quite expensive. 1 point = 1% of the amount of the loan. If the loan is $100,000, then 1 point =$1000.

Refinancing a loan to lower interest rate. The amount of the reduction in payment, needs to be compared with how much it costs to refinance the loan - the lenders don't do it for free....no matter what they might tell you to get you to do it. That cost then needs to be compared with how long one expects to be in the house. Usually the interest rate has to be at least 2.5-3% lower to make the costs worth it, as the costs usually are 3-5% of the amount of the loan - as if the house was being purchased anew. Those costs are either up front or attached to the amount of the loan.....increasing the original amount being refinanced by those costs. Most often, it's attached. That also needs to be taken into consideration as to deciding if it's worth it. Pretty risky in today's market, unless there is a lot of equity in the house prior to refinancing.

It doesn't matter how low the interest rate is, if it increases the amount of the mortgage to the extent that there is no equity or that the house can no longer be sold at a price high enough to recover the costs of the mortgage. It is not unusual for a lender to add a penalty either, if the house is sold within a certain time frame. I had refinanced my house with an ARM and sold it 45 DAYS before the minimum time was up and it cost me $7200 penalty. I was pissed to say the least, but there was nothing I could do about it.

A mortgage lender can explain it much better than I can.

It's the same as with most other things though....if it sounds to good to be true....it probably isn't exactly as it appears.

[Tantal]

When we finally get a house, we plan to have $15,000-$20,000 down.  We want a 30 year FIXED mortgage.  No other junk. 

Horrible idea! Do you have any idea how much interest you pay on a 30-year note? Either get a smaller house, or save up another year or two to get together a down payment that will allow you to get a 15-year fixed mortgage. Then, if your lender has an equity enhancement program, get on that to shave another couple of years off. By the time I'm done with my mortgage, we will have been in this house for 10 years 6 months. If you want a more in-depth, but easy to understand, explanation for all of this, get a copy of Dave Ramsey's "Total Money Makeover". Mrs. Tantal and I had accumulated some debt; however, since using the Ramsey Plan, we've knocked down everything but the mortgage, which has 2 years left. I'll be 38 and Mrs. Tantal will be 35 when we have EVERYTHING paid off.

[Thor]

Horrible idea! Do you have any idea how much interest you pay on a 30-year note? Either get a smaller house, or save up another year or two to get together a down payment that will allow you to get a 15-year fixed mortgage. Then, if your lender has an equity enhancement program, get on that to shave another couple of years off. By the time I'm done with my mortgage, we will have been in this house for 10 years 6 months. If you want a more in-depth, but easy to understand, explanation for all of this, get a copy of Dave Ramsey's "Total Money Makeover". Mrs. Tantal and I had accumulated some debt; however, since using the Ramsey Plan, we've knocked down everything but the mortgage, which has 2 years left. I'll be 38 and Mrs. Tantal will be 35 when we have EVERYTHING paid off.

I'll disagree with that and here's why: One CAN get a 30 mortgage where the payments and interest rates are lower. THEN, they can pay extra on the principle and still pay off the house in less than the 30 years. I've read of people paying off their mortgages in 10 years with a 30 year loan.

[USA4ME]

We are not in the market to buy a house as of right now.  I am just asking a general question because it seems as though interest rate buy downs have become a bit popular.  Or maybe they always have been.  I don't know.  We are losers stuck renting... probably until forever.  lol

The interest rate buy downs sound like a scam.  To me, it sounds like you're getting a deal, but in the long run... you're not.

Can someone explain these to me?  They just sound fishy.

Not a scam.

I've owned and operated my own mortgage business for 20 + years.  What you need to do is to calculate the cost of the buydown compared to how long it will take you in payments to make up the cost of the buydown.

For example (and using really simple, unrealistic numbers), let's say your buydown cost $1000 and saves you $10 a month.  On the surface, it would appear you will have made up the $1000 in buydown costs in 100 months.  But you also need to calculate that if you had kept the $1000, how much you think you would have earned from investing it in 100 months and add that into the equation,

So let's say your $1000 would have earned $100 in 100 months.  So now with your payments at $10 less because of the buydown, you would have made up the $1000 in 110 months.

Are you better off?  I dunno.  Are you going to be making extra payments?  Do you anticipate running into a lump sum of money in the next 5 years in order to pay-down your principal balance or pay off the mortgage completely?  There's a lot of questions you need to ask yourself that only you know.

Feel free to PM me if you have any questions.  I'll help you any way I can.

For the record, in over 20 years I've originated 1000's and 1000's of mortage loans, and I may have done 10 buydowns during that time.

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[USA4ME]

Refinancing a loan to lower interest rate. The amount of the reduction in payment, needs to be compared with how much it costs to refinance the loan - the lenders don't do it for free....no matter what they might tell you to get you to do it. That cost then needs to be compared with how long one expects to be in the house. Usually the interest rate has to be at least 2.5-3% lower to make the costs worth it, as the costs usually are 3-5% of the amount of the loan - as if the house was being purchased anew.

I have a slightly different way that I guide my customers.  If the cost of doing the loan can be covered by the reduction you get over a period of 2 years, it's likely a good deal.  For instance, the refinance costs $2000, but your mortgage is reduced by $100 a month, then in 2 years you would have saved $2400 in payments, so on the surface it's a good deal and at least worth examining further.

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[Zeus]

I'll disagree with that and here's why: One CAN get a 30 mortgage where the payments and interest rates are lower. THEN, they can pay extra on the principle and still pay off the house in less than the 30 years. I've read of people paying off their mortgages in 10 years with a 30 year loan.

Situations such as you describe are doable as long as fiscal discipline is applied,for most folks that's a big IF.

Buydowns are neither good or bad like most facets of financing they are situational. For most folks they aren't fiscally positive.

Buydowns on the norm are best on upper value homes, say starting at about $250K.  I put the financial feasibility at $250K because of minimal savings and better outside investment deals. Again most any deal works for the better as long as there is discipline is applied.

[Chris_]

Horrible idea! Do you have any idea how much interest you pay on a 30-year note? Either get a smaller house, or save up another year or two to get together a down payment that will allow you to get a 15-year fixed mortgage. Then, if your lender has an equity enhancement program, get on that to shave another couple of years off. By the time I'm done with my mortgage, we will have been in this house for 10 years 6 months. If you want a more in-depth, but easy to understand, explanation for all of this, get a copy of Dave Ramsey's "Total Money Makeover". Mrs. Tantal and I had accumulated some debt; however, since using the Ramsey Plan, we've knocked down everything but the mortgage, which has 2 years left. I'll be 38 and Mrs. Tantal will be 35 when we have EVERYTHING paid off.

It doesn't really matter right now.  That's just an idea as of this moment.  We wouldn't mind a 15 year loan, but we have no idea how the market will be when we are ready to buy.  Who knows what the interest rates will even be?  Saying 30 year fixed (right now) is a safer bet for us.  We always pay extra on our loans when the funds are available.  My husband pays $50 extra a month on his car.  We were ahead a month in payments.  It is a huge help if finances get tight.

By the time we purchase a house, our cars will be paid off.  So our only loan would be a house loan.  We are not a family that buys new cars every three to five years.  I don't plan to buy another car until my car stops working completely.... which seems like forever since I just bought my car two years ago.  lol

I'll be 27 in August.  Our goal is to have a house by 30... but with the amount we want to save, it will probably be a couple years after that goal.  But again, with the big tax increases coming up soon, we will probably have NO money to put into savings every two weeks.  

A girl can dream about a house though... right?  We may be stuck renting with some weird characters way longer than expected.

[RobJohnson]

Buy downs are common in the automotive biz. I did not know they did the same thing with houses.

Often a car dealership will offer 0% until (fill in the blank) or will have a 2.9% APR sale on all used cars, etc. They simply buy down the rate from a local bank to encourage sales.