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.