Creative Financing Strategies - Rate Buy Down Program

Creative financing strategies for Buyers in this changing market:  

With mortgage interest rates increasing this year, lenders are offering strategies to help home buyers. One of those strategies is something called a Rate Buy Down Program.

Here is how the program works:

The lender uses a credit from the seller at closing (buyer cannot contribute) to temporarily buy down your interest rate for either the first 1-3 years, (based on the credit and what the buyer qualifies for) which reduces the buyer’s mortgage payment.  The advantage is that the rate is much lower and much less of a cost, and the money on the temporary rate buy down stays with the buyer. So any left-over money goes back to the buyer in the form of a direct pay down to principal if the buyer refinances.  For example, if a buyer bought down the rate for the first two years but had the opportunity to refinance in 9 months, any additional monies remaining would be credited back to the buyer's new loan principal balance. 

A discount point - Can be paid using any funds to buy down the interest rate and is permanent.  Lenders may caution you not to pay points in this current market as all of the signs point to interest rates dropping as we move further into our recession.  Keep in mind, the money for discount points is not recoverable, meaning that if you were to refinance in 9 months that money is a sunk cost. 

Here is an example of a 2/1 Rate Buy Down on $400k home purchase with a starting interest rate of 7.125% 

Purchase price: $400,000 

Down payment (FHA/3.5%): $14,000 

Monthly payment:
$3,200 

2/1 Rate Buy down cost: $9,206 (paid at closing by the Seller) 

New Monthly payment (yr 1): $2,696 at 5.125% interest for the first year 

Monthly payment (yr 2):$2,944 at 6.125% interest for year two