What is a temporary buydown and when does it make sense to get one?

Temporary buydowns are best for those who need to buy a new home now, but expect to have a higher monthly income later. Basically, a temporary buydown helps people qualify for mortgages due to a smaller initial monthly payment. The interest payments are reduced for the first few years in exchange for a cash deposit. Then, they gradually increase over the course of a few years. For example, Guild’s seller-paid or lender-paid temporary buydown program reduces the interest rate for the first year by 2%, and 1% the following year. By the third year, payments resume as normal.  Buydowns can be added to many regular loan programs such as Conventional, FHA and VA loans.

• Cash deposit (buydown fee)

  While lower payments are helpful, a cash deposit is required. Also called the buydown fee, it’s what offsets the discounted interest. This cash deposit can come from a number of sources. The buyer can supply it, a family member can provide it as a gift or a motivated seller may be willing to pay it. Sometimes home builders pay the fee for families moving into newly constructed homes.

• Temporary buydown vs ARM

  You’ll probably see some fixer-upper foreclosures out there with a 5-figure asking price. Though you may be willing to renovate, securing financing may be a challenge. Condition issues that endanger health and safety can prevent you from getting a mortgage, and the bank in possession of the home will rarely pay for the upgrades needed to bring it up to code.