How Temporary Rate Buydowns Came to Be
Temporary Rate Buydowns generally only became available later in 2022 with most lenders as a promotion from some lenders (many have since adopted them) to help with combatting higher rates by lowering the first 1-3 years of mortgage payments at no additional fee to borrowers, so long as they have sufficient seller-paid closing costs (AKA “seller credits”).
Lenders started doing this to draw more clients towards them.
More details on Temporary Rate Buydowns can be seen here: https://www.johannsengroup.com/temporary-rate-buydowns?rq=temporary
Temporary rate buydowns are only available by using seller-paid closing costs, lender-paid closing costs, or a combination thereof. Not all lenders allow lender-paid closing cost options.
We can refer to EITHER seller-paid or lender-paid closing costs as “Interested party contributions” hereon.
Interested party contributions:
1) Are limited based on down payment amount and program type
a. Conventional loans (primary or second home occupancy):
If your down payment is less than 10%, Interested party contributions are up to 3%. (LTV/CLTV greater than 90%)
If your down payment is 10% – 25%, Interested party contributions are up to 6%. (LTV/CLTV between 75-90%)
If your down payment is more than 25%, Interested party contributions are up to 9%. (LTV/CLTV less than 75%)
a. Conventional loans (investment property):
up to 2%, regardless of down payment
b. FHA loans (primary occupancy only)
up to 6%, regardless of down payment
b. VA loans (primary occupancy only)
up to 4%, regardless of down payment
b. USDA loans (primary occupancy only)
up to 6%, regardless of down payment
2) Can only cover closing costs
Interested party contributions CANNOT cover the down payment
This means that if eligible closing costs are less than Interested party contributions, that a borrower can end up with UNUSED Interested party contributions.
Temporary rate buydowns are an eligible closing cost that can be covered by Interested party contributions, which ensures borrowers can more easily use all of their Interested party contributions.
Any Hidden Fees?
Any of the money that goes towards a temporary rate buydown goes towards the payment reduction at a rate of 1-1 dollar for dollar. So if $20,000 is in the rate buydown escrow account (and that would be the exact same cost as well, no fee is charged for implementing this) then you would have exactly $20,000 in money saved from the temporary buydown on monthly payments.
There is no fee to setting up a temporary rate buydown and no extra fee for finishing the temporary rate buydown, either because the time has elapsed (e.g., a 2 year buydown and 2 years pass) or because you pay off your mortgage early (e.g., you hit the lottery and pay off the mortgage, you refinance, you sell your house and pay off the mortgage, etc.). Of course, as you may know, you do face potential costs for paying off a mortgage (either completely or any amount below 75% of the original loan amount) before 6 months has passed, but that is standard and not particular to temporary rate buydowns.
More details on this can be seen here: https://www.johannsengroup.com/temporary-rate-buydowns?rq=temporary
Mortgage calculator
You can go to this (or any other) mortgage calculator to confirm this math as well: https://housingbrief.com/r/22CNQW
- If you like excel, the “PMT” function also works for calculating mortgage payments.
Get in touch if you have questions on any of this at all!