Published by REALTOR.com | December 19, 2022
Rising borrowing costs have dramatically increased the cost of buying a home this year, reviving interest in mortgage products like temporary buydowns that fell out of favor after the 2008 financial crisis.
Carley Chase found her dream home in Chandler, Ariz., this summer: a three-bedroom ranch, close to work, with a pool and a backyard lined with palm trees.
Soaring interest rates threatened to put it out of reach. Her lender suggested a temporary buydown that would lower her mortgage payment for the first three years.
“I don’t think I would have been able to afford it without the buydown,” Ms. Chase said.
Rising borrowing costs have dramatically increased the cost of buying a home this year, reviving interest in mortgage products like temporary buydowns that fell out of favor after the 2008 financial crisis.
Temporary buydowns offer steep but short-term savings on mortgage rates. Borrowers get a much lower rate in the loan’s first year that gradually increases until it resets to a rate in line with market conditions at the time the loan was made.
They differ from standard buydowns, in which buyers pay an upfront fee to permanently lower the loan’s rate. And unlike adjustable-rate mortgages, the loans reset to a fixed rate.
Buyers typically don’t cover the cost of temporary buydowns. Home sellers, lenders and builders can use temporary buydowns to win over buyers concerned about high rates. They cover the difference between the actual mortgage rate and the rate the buyer pays, stashing those funds into a custodial account that the lender dips into each month.
“There have been a lot of buyers sitting on the sidelines waiting for prices to go down or rates to go down. This is a way they can get rid of that payment shock a bit.”
—D’Ann Melnick, real estate agent at eXp Realty, Washington, D.C.
Scores of lenders including Rocket Mortgage and United Wholesale Mortgage are touting temporary buydowns as a way to soften the blow of rates that have roughly doubled over the past year. Home builders are also using them to entice buyers. About 75% of builders surveyed in early December by John Burns Real Estate Consulting said they were paying to reduce buyers’ mortgage rates, either for the full mortgage term or for a shorter period.
