“KEEP IT LONG ENOUGH, IT WILL COME BACK IN FASHION” Buydown Program Considerations BY ELIZABETH MADLEM, Vice President of Compliance Operations and Deputy General Counsel, Compliance Alliance The early 2000s are re-emerging with their crop tops, low-rise jeans, flip phones and mortgage buydowns. Deja-vu! Pre-crisis teaser rates have been reborn into mortgage buydowns, both temporary and permanent. With the housing markets remaining pricey and rates still higher than they have been in years, many buyers are looking for assistance in any form. And as the refinancing market cools down, mortgage originators are becoming increasingly more creative in finding innovative ways to bring business through the door. And this has led to lender, builder and seller concessions to help close deals. Buydowns generally are going to refer to when a borrower pays “points” upfront to reduce the mortgage rate to a level that places their monthly payments in a range they can afford. It is thought that the rate has been “bought down” from its original rate for the entirety of the mortgage by paying a lump sum upfront. The more recent trend has been for these to be seller-paid rate buydown concessions, with the seller offering to reduce the buyer’s mortgage interest rate for either the first few years (temporary) or for the duration of the loan (permanent). The seller is either contributing to the buyer’s closing costs or paying for a temporary rate buydown. What the market is seeing now is an influx of temporary buydowns, with the most common ones being a “2-1” and “1‑0,” meaning a 2% interest rate reduction in the first year and a 1% interest rate reduction in the second year, or a 1% interest rate reduction in the first year only, respectively. Sellers, builders, lenders or a combination of all three put up money to cover the difference in interest rate payments between the original mortgage rate and the reduced mortgage rate. So, for a 2-1 example, the mortgage rate is reduced by 2% for the first year and then will step up by 1% in the second year and another 1% in the third year to reach the actual mortgage rate at origination. It essentially works as a subsidy for the first two years of the mortgage before reverting to the full monthly payment. And the benefits are there for consumers — it can make purchasing a home more affordable (even if temporarily) and can “buy time” for borrowers to refinance into a lower rate should interest rates fall. With permanent rate buydowns, generally, it will be a seller paying a portion of the buyer’s closing costs that are used towards buying mortgage discount points, with each point reducing the rate on average by about 0.25 percentage points, costing 1% of the loan amount. So, if a borrower bought a Utah Banker 6
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