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Utilizing Interest Rate Buydowns During a Changing Market

Although Mortgage Interest Rate Buydown programs for home loan financing is nothing new, it has not been widely spoken about for several years as the housing market went bonkers during the pandemic. As interest rates have steadily increased, and the Fed continues to raise interest rates in an effort to cool inflation, in conjunction with the higher listing price of homes for sale, the prospect of financing a home under these conditions may seem infeasible for some and unwise to others. These factors weigh all the more for those who are in the position of trying purchase out of necessity, such as those moving for work. But the market shift toward a Buyer's Market means more negotiating power when making an offer.
So to start, what exactly is an interest rate buydown?

Simply put, it is what it sounds like it is. A buydown is a financing technique where a buyer who is financing a home purchase attempts to obtain a lower interest rate for at least the first few years of their new mortgage. When interest rates are being hiked upward, but we are anticipating a drop in interest rates in the future, the utility of a buydown becomes more relevant and apparent. There are permanent buydowns and temporary buydowns, but let's focus on temporary buydowns for this article due to relevance of the market conditions.
The Abair Team at Armed Forces Bank is currently offering a temporary 2-1 Buydown. A 2-1 buydown is a solid way to lower monthly payments, relatively short term, while rates go up and then come back down. Essentially, you buy down the interest rate available to you by 2% for the first year of your mortgage, 1% for the second year of your mortgage, and then it returns to the normal interest rate from that third year onward. This period of reduced interest on your mortgage means an opportunity to save money while the mortgage payment is lower. And a concern may be affording the payment as the rate returns to normal, but the borrower is pre-approved for the normal rate so as to reduce to payment shock. 
As the term of the buydown ends, refinancing with improved market interest rates helps settle you into a more cost effective long-term position. The 2-1 Buydown cost with Armed Forces Bank needs to be paid from Seller Concessions. Something interesting about this is that is may be more appealing for the seller to offer a buydown rather than lower the listing price of their property, while the buydown may also benefit the buyer more than the listing price reduction. This makes it important for your buyer's agent to negotiate that into the offer and important for the listing agent to provide temporary buydown concessions as part of their listings. This is likely to be a differentiating factor in the amount of time it takes for a house to sell, and it can make a considerable cost difference when used strategically.
A few questions to ask to determien whether or not a buydown may be suitable:
-How long do you plan to own the home?
-Can interested-party contributions be negotiated?
-Are you comfortable with the risk of your payment increasing?
-Is it likely that your income will increase or decrease?
-What are your payment expectations?
Speaking with an experienced lender familiar with a variety of strategies with access to a variety of loan programs well ahead of actively shopping (~6 months-1 year) can significantly aid in your approach to forming a favorable financing scenario. Even more so, working with a lender who holds the aforementioned attributes while having a powerful team there to move at your pace makes for an even greater difference. Let me run the numbers for you and show you the options. I am always happy to connect with my clients and with those seeking clarity and confidence on how to create a stronger mortgage financing position.
If this information is of interest to you, and if you found the calculator to be useful, share it with a friend! The number-crunching calculator below help quickly lay out some basic details according to the data you input and can be downloaded as an Excel spreadsheet to share with others.
I am easily contacted via my social media and cell phone, provided at the top right of this page.

-Paul Abair
The Abair Team

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Armed Forces Bank

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