Are you considering taking advantage of a temporary rate buydown to get a lower interest rate on your home loan? Be aware that this strategy can be risky for low-down payment borrowers. We’ll explain why and offer alternatives. Keep reading to learn more!
What is it?
A temporary rate buydown is a financing tool used when purchasing a home. It subsidizes the loan’s interest rate, reducing the size and cost of monthly payments. Many clients will elect to do this, thinking they can refinance their loan at a lower, permanent rate once the market improves. However, there is risk involved for low-down payment borrowers. The monthly payments could become unaffordable if a new loan is unavailable after the rate buydown period ends. Therefore, it’s important to plan around a worst-case scenario when considering this option. The question should be: “Can I afford this payment if I am stuck with it?”
Here are some specific risks that could make a long-term loan unavailable and turn your temporary buydown loan into a hazard for you:
- Rates don’t improve – If rates do not improve, a refinance will not benefit you, and lower payments will likely not be available.
- Home values go down – You may not qualify for better terms if values drop. Low-down payment buyers need more room for even slightly reduced values. For example, if you buy a home for $500K with 5.0% down and your home is worth $485K a year later, your options to refinance are mostly eliminated.
- Credit changes – We’ve seen it all; incorrect info reported on credit, medical collections, a $25 phone bill sent to collection, new debt, cosigned for student loans, etc. Changes to your credit will affect your ability to qualify again.
- Employment changes – Perhaps you changed to an independent contractor, went on disability leave, went from employee to partner, have reduced hours, or lost a job. All can affect your ability to qualify.
The risk of a temporary rate buydown is something to consider carefully before deciding if it is the right financial decision for you. This approach can cause problems for low-down payment borrowers. They may become stuck with unaffordable monthly payments if they cannot refinance into a lower interest rate once the buydown period ends.
We’ll break it all down for your individual needs. Call us today!