BUYER'S RESOURCE »
Last week we took a detailed look at loan programs with a buydown option. These are great loan programs that are available to homebuyers today. However, they don’t come without some risk. Today, we want to share some of these risks with you, not to scare you or push you away from the loan programs but because we believe educated borrowers make for long-term homeowners. Also, we want to make sure you hear the facts that others might not share because they are afraid it could result in a lost transaction. Below are five important factors to take into consideration before using a loan with a buydown option.
Your Payment Will Go Up, Plan On It
The way any 3-2-1 or 2-1 or 1-0 Buydown loan program works is by using an escrow account to subsidize interest payments for the pre-set number of years. This means your payment is guaranteed to go up each year of the buydown loan program, whether that is one year, two, or three years. The amount the payment will go up each month is no small amount either, in some cases it could be $500 or more that your payment will go up by the end of the subsidized payment period. You will hear in marketing efforts that you don’t need to worry about this because everyone will get raises each year to help offset this cost. The truth of the matter is you cannot guarantee these raises, and often your annual raise is eaten up by increased insurance costs or taxes, so you do not actually see that much additional take-home pay.
The other concern is if you forget this increase in payment is coming and do not plan for it, it would be easy to increase your monthly expenses and not be able to cover this larger payment once it comes due. It would be as simple as taking on a new car payment, which according to BankRate.com is now $667 per month.
The easiest way to ensure you’re ready for this higher payment is to build it into your budget from day one. Even if you decide not to set the money aside, include it in the budget so that you don’t forget it is coming, and you know you can make the new higher payments once they arrives. The worst-case scenario here is you saved a large sum of money that can be used for home improvements or that new car once your payment is fixed for the remainder of the loan or a refinance.
Interest Rates Aren’t Guaranteed to Come Down
Another common marketing statement you’re hearing with these buydown programs is that you can simply refinance your home next year when rates come down and get a new lower fixed rate. Now, this could be possible, but the rates are not guaranteed to come down this quickly. In fact, the Feds recent talks have hinted at continued rate hikes in the near future and then a pause to see how inflation and economy react. Although the Feds rates do not directly impact the mortgage rate, they do tend to follow suit when the Fed rates are raised or lowered. So, if this remains true, it is not unrealistic to see rates go up even more over the next few months and then level off. From there, it could depend on how long the Feds hold rates and then IF they start dropping them. Right now, we do not have a clear idea of how long they will hold the rate before making a decision to continue to raise or drop it. Bottom line, we don’t know if rates will be lower this time next year, higher, or the same. Being aware of that, don’t treat these buydown loan programs like you’re only going to use them for a short period of time before you refinance.
Values May Cause You to be Upside Down
The real estate market looks very different today than it did six months ago when home values were increasing almost daily. In fact, today values have come down since the peak we saw in July of 2022. If interest rates continue to stay high and buyers decide to sit it out and not buy a home, there’s reason to believe values will continue to trend downward over the next few months. This means if you’re buying with a buydown program and putting a smaller amount of money down, you might not have enough equity to refinance, even if interest rates are lower. When refinancing, you are not able to borrow more money than the home is worth. In fact, most loan refinance programs will not finance more than 96.5% MAX of the home’s value, and many have even lower limits than that. If you find that your original loan amount is higher than this 96.5% max, you simply will not be able to refinance until you’ve built more equity. In this scenario, you’d be stuck with the higher monthly payments after your buydown period is over.
Not All Buydown Programs Are the Same
With the high-interest rate environment we are currently experiencing, more lenders are offering some type of buydown program than those that aren’t. However, it is important to understand that not every program is the same. For example, some programs may allow any remaining unused funds in the escrow account set aside to subsidize your payment to be used to lower your loan balance at the time of refinancing. For other programs, that money is simply lost. Some may require additional fees upfront to have the option for the loan program. It is important to ask many questions and even talk to several different loan officers to determine the best program for your needs and budget. It is recommended to have these conversations prior to making an offer, so you know how to structure your offer to get the most use out of your loan program.
Work With a Real Estate Pro Who Has Your Best Interest in Mind
The bottom line with these loan programs is when used correctly they can be a great tool to help you buy a home in today’s current market and interest rate environment. In general, when buying a home, there are always risks involved, and a loan program with a buydown option is no exception. In order to get the most of out of these programs and protect yourself and your home in the future, it is important to not only work with a trusted lender that has your best interest in mind but also a trusted and knowledgeable real estate agent.
At TK Homes, we care about you, and we take the time to understand your needs, the financing options available to you, and the current market conditions. We use this information to help you achieve your real estate goals. Contact us today and let’s talk about if buying a home with a buydown loan program makes sense for you. We promise at the closing table you will know exactly what you’re getting into with your loan, and you will be set up for success no matter what the market conditions bring in the future.
~ Written by CEO/REALTOR® Trevor Kohlhepp
**TK Homes and its team members are not licensed financial advisors or mortgage professionals. This is not financial advice; all specific financial questions should be asked to mortgage professionals and/or financial advisors.