NerdWallet: A home buying tactic from the ’70s and ’80s is seeing a revival—here’s how it works and what buyers and sellers get out of it

by | Nov 7, 2022 | Stock Market

This article is reprinted by permission from NerdWallet.  Home buyers are looking for ways to whittle down their mortgage rates. As a result, a once-popular home-selling tactic is making a comeback. It’s called a temporary buydown, and it was widely used when mortgage rates were zooming upward in the late 1970s and early 1980s.

The revival of the temporary buydown is timely, as mortgage rates are at a two-decade high, with the Federal Reserve expected to raise the floor under mortgage rates twice more this year. Fewer people are buying homes because rising rates make homeownership unaffordable. In some markets, negotiating power is even shifting from sellers to buyers. In these conditions — when interest rates are rising and home sellers must make an effort to lure buyers — temporary buydowns can flourish. It’s time to dust them off and put them to use.How do you buy down a mortgage rate? A temporary buydown reduces the home buyer’s monthly payments in the first year, or sometimes in the first two or three years. Instead of making the mortgage’s full monthly payments from the get-go, the home buyer will make discounted payments for a year or more. This is accomplished by subsidizing the interest rate that the borrower pays. For example, let’s say a buyer gets a mortgage at a 7% interest rate, with a one-year buydown. Because of the buydown, the monthly payments in the first year are based on a 6% interest rate before rising to 7% thereafter. If the borrower got a $300,000 mortgage in this hypothetical example, the buyer’s principal-and-interest payments in the first year would be $1,799 a month, before rising to $1,996 a month in years two through 30. A buydown under these terms would save the borrower about $197 a month in interest in the first year, for a total of $2,367. Traditionally, most temporary buydowns are paid for by ho …

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