With a 2-1 buydown, a builder would pay roughly 2% of the loan amount. That would bring the rate down from, say 6.5% to 4.5% in the first year of the mortgage. In the second year, the rate would bump up a notch to 5.5%. And then, starting in the third year and lasting for the duration, the rate would return to 6.5%.
So, assuming a conventional mortgage with 20% down, a 2-1 buydown would cost 2% of the sale price, the Burns firm says. On a $340,000 house, the cost, then, would be $6,300. But the drawback is that, for the most part, borrowers still have to qualify at the highest rate. Those who can gain “some breathing room.”
Help For Those Who Need It
For those who can’t qualify, builders are switching to full-term buydowns so their customers can make the grade. To do so, though, is expensive. To cut the rate on the $340,00 house in the example used above, the cost is $16,300. On a $590,00 house, it would be a whopping $28,300.
“Builders love buydowns,” says Kevin Parra, CEO of Plaza Home Mortgage in San Diego. “They always have.”
It’s doubtful many individual sellers are willing to donate twenty grand or so of their profits to the strangers buying their homes. But the cost of the shorter-term buydowns is much more palatable.
I asked Parra and his team at Plaza to work up a few examples for a house selling for $375,000. Assuming a 20% down payment, the loan amount would be $300,000. At Plaza, a wholesaler that works through both the broker and correspondent channels, the cost to the seller on a 2-1 buydown would be 2.2 percent, or $6,600.
The savings to the buyer, though, is considerable: $366 a month in the first year before dropping to $188 monthly in the second. A one-year buydown would save the borrower $188 a month, but the cost to the seller is just 0.75% of the loan amount.
But there’s a somewhat hidden benefit to buydowns most people fail to consider. If rates come down and the borrower refinances before the buydown period comes to an end, Parra points out, the prepaid interest — that’s what a buydown really is, prepaid interest — what remains in that escrow account is returned to the borrower, not the seller.