The Low Down on Buy Downs

Hey All, here is a scenario I believe is going to be coming up a lot. Whether to go with a 2/1 Buy Down or use a Permanent Buy Down to decrease the rate. Many lender are coming out with a 2/1Buy Down. We are going to look at the 2/1 buy down vs. a permanent buy down and why the permanent buy down will help buyers in this market. I will go through both options, and how they work. 2/1 Buy Down: How it works: In this scenario the Buyer is locked at current pricing (lets say 6.25%), but receives a 2%(4.25%) rate reduction the first year and a 1%(5.25%) rate reduction the second year. The third year the buyer pays the full amount of the mortgage at the rate they were locked in at (6.25%)The seller pays the difference in interest for the 2 years, this amount is deposited into an escrow account. When the Buyer makes a mortgage payment the money in the escrow account covers the difference between the rate reduction payment and the full payment the Buyer was locked in at. Pros: * Buyer gets a lower payment for the first 2years * If they refinance before the 2 years the money in the escrow account is applied to the principle. * Helps with cash flow for investment properties (certain terms apply, as 2% is max concession on investment properties) Cons: * Must be seller financed * You are qualified and approved on the LOCKED IN rate (in this case 6.25%) * Does not bring down DTI The biggest issue we face right now is Affordability, and although 2/1 buy downs help with payment, it does not help buyers increase their purchasing power that was lost with the increase in rates. This is why, in my opinion, a 2/1 buy down is just a gimmick for the lenders to use. Permanent Buy Down: How it works: This is simply using a seller concession to strictly pay for discount points for the Buyer. The money from the seller goes directly to permanently buy down the rate. Pros: * Seller can contribute up to the maximum concession (based on down payment) towards the buy down * The buy down rate IS the rate used to qualify and approve the Buyer (This significantly reduces DTI, and helps clients purchasing power) * Can help clients go conventional versus FHA (Due to high DTI) Cons: * Has to be seller financed due to High cost mortgage laws * Not as great savings vs a 2/1 buy down initially, but helps qualify for a larger purchase As you can see they both can have some benefits to our clients. However, in this increasing rate market the biggest issue we face is affordability. With a permanent buy down we can help clients afford a higher priced home they wont be able to afford in this market. On average a 1% decrease in rate equals about 45K in purchase power. Hope this helps Thanks Jeff McCarthy