The
most common buydown is the 2-1 buydown. In the past, for
a buyer to secure a 2-1 buydown they would pay 3 points
above current market points in order to pay a below market
interest rate during the first two years of the loan.
At the end of the two years they would then pay the old
market rate for the remaining term.
As
an example, if the current market rate for a conforming
fixed rate loan is 8.5% at a cost of 1.5 points, the buydown
gives the borrower a first year rate of 6.50%, a second
year rate of 7.50% and a third through 30th year rate
of 8.50% and the cost would be 4.5 points. Buydown were
usually paid for by a transferring company because of
the high points associated with them.
In
today's market, mortgage companies have designed variations
of the old buydowns rather than charge higher points to
the buyer in the beginning they increase the note rate
to cover their yields in the later years.
As
an example, if the current rate for a conforming fixed
rate loan is 8.50% at a cost of 1.5 points, the buydown
would give the buyer a first year rate of 7.25%, a second
year rate of 8.25% and a third through 30th year rate
of 9.25% , or a three-quarter point higher note rate than
the current market and the cost would remain at 1.5 points.
Another
common buydown is the 3-2-1 buydown which works much in
the same ways as the 2-1 buydown, with the exception of
the starting interest rate being 3% below the note rate.
Another variation is the flex-fixed buydown programs that
increase at six month interval rather than annual intervals.
As
an example, for a flex-fixed jumbo buydown at a cost of
1.5 points, the first six months rate would be 7.50%,
the second six months the rate would be 8.00%, the next
six months rate would be 8.50%, the next six months rate
would be 9.00%, the next six months the rate would be
9.50% and at the 37th month the rate would reach the note
rate of 9.875% and would remain there for the remainder
of the term. A comparable jumbo 30 year fixed at 1.5 points
would be 8.875%.
