What is a Temporary Buy-Down Mortgage – Bay Area Mortgage Broker Explains Details.

When Bay Area mortgage rates go higher?

It’s no secret that interest rates have skyrocketed for Bay Area home buyers from their low points in 2021. When interest rates rise rapidly, it quickly diminishes the ability for many borrowers and prospective home owners to purchase a home that they might’ve been preapproved for before.

Many borrowers throughout the Bay Area are looking for ways to stay in the market and purchase a home they still love while making it more affordable.

This is where the prospect of using a temporary buydown mortgage or a loan discount to save on your mortgage payment comes in.

Although these programs are not new by any means, they have become wildly popular since the Fed started raising interest rates, and mortgage costs have gone up so much for the consumer.

What is a temporary buy-down mortgage?

A temporary buy-down mortgage is when the lender agrees to lower the interest rate for a certain period temporarily. This will come at a cost to either the borrower or the seller of the home that is in contract.

This can be done through various methods, such as paying “points” (a percentage of the loan amount) to the lender in exchange for a lower interest rate or having a third party (usually the seller) contribute funds to temporarily lower the rate.

This is a case that is used where everyone can benefit. The lower interest rate makes the mortgage payments more affordable for the borrower. By the seller making a concession for the buydown, they are still able to sell their home for an attractive price. 

The rate will eventually increase to the original level after the temporary period expires.

What is a loan discount for Bay Area mortgages?

A loan discount refers to a permanent reduction in the interest rate a borrower can receive on their mortgage loan.

The lender usually offers this reduction to make a home purchase more affordable.

Permanent discounts can be provided in various ways. Discounts are typically offered in exchange an upfront cost in the form of points or a percentage of the loan amount.

What are the benefits of a temporary buy-down mortgage for Bay Area home buyers?

A temporary buy-down mortgage can provide several benefits for the Bay Area borrower, including:

1. Lower monthly payments: A lower interest rate means lower monthly mortgage payments, making it more affordable for the borrower to purchase and own a home over time.
2. Increased buying power: Mortgage lenders consider debt to income ratios very important when qualifying a loan. Most lenders will qualify the borrower based on the original rate and not the lower temporary buy-down rate. Because of this a temporary buy- may NOT allow for increased buying power.
3. Higher-interest rate environment: In a high-interest rate environment, a temporary buy-down mortgage can be a good option for borrowers who want to take advantage of the lower rates. Most buy-downs last for a 1, 2 or 3 year period. Many borrowers anticipate an opportunity to refinance into a fixed rate loan if and when interest rates are more favorable.

Borrowers should consider the long-term affordability of the mortgage and its potential interest rate changes before making a decision. While a refinance may be advantageous, it is not something that is ever promised or guaranteed.

When should a Bay Area borrower consider a temporary buy-down mortgage?

There are three main reasons Bay Area Borrowers consider obtaining a temporary buy-down mortgage.

1. The Buyer/Borrower needs lower monthly payments: If a borrower is on a tight budget and needs lower monthly payments to afford a home, a temporary buy-down mortgage can help make that happen for a set period of time.
2. The Buyer/Borrower expects interest rates to fall: If a borrower believes interest rates will fall within the buydown period, a temporary buy-down mortgage can provide a lower rate for a set time, with the prospect of a more attractive refinance later down the road.
3. There is only a short-term need: A temporary buy-down mortgage may be suitable for borrowers who expect to be in the home for a shorter period. Usually three years or less.

Borrowers should carefully consider the long-term affordability of the mortgage and its potential interest rate changes, as well as the overall cost of the buy-down, before making a decision.

They should also compare the rates and fees of temporary buy-down mortgages and a discounted mortgage option with traditional fixed-rate mortgages to determine the best choice for them.

In conclusion: In a rising right environment, the temporary buy down mortgage option has become very popular for Bay Area borrowers to get into a home with more affordable monthly payments, keeping in mind that the monthly payments are not fixed for good. There may be a need for a refinance later down the road. Since borrowers are qualified, based on the original interest rate, as long as their income stays the same or gets better when the loan adjusts upwards to the original rate, they should still be able to afford the home if a refinance is not a possible option.

Borrowers should find a well-experienced local Loan Officer that will help them with their planning and keep in touch when an excellent opportunity for a better option is available.