A type of loan that gives homebuyers a low initial interest rate is back in vogue as lenders try to make homeownership more affordable amid high interest rates.
Known as a mortgage buydown, this loan typically involves a cash payment from the seller that lowers the borrower’s mortgage interest rate for a period of time (usually two to three years) before returning to full interest. The seller gets the money back once the monthly mortgage is paid. It can give buyers struggling with rising house prices and inflation in food and other commodities a temporary leeway in their monthly spending.
Lenders are offering repurchase loans at a time when demand for mortgages has dropped significantly due to high interest rates. Average interest rates on traditional 30-year fixed mortgages fell to 6.61% in the week ending 17 November from 7.08% the week before. That’s still double the 3.1% average from a year ago.
This has led to a decline in mortgage applications. Nationwide, new mortgages fell 19% in the third quarter compared to the second quarter and 47% compared to the third quarter last year, according to ATTOM Data Solutions, a real estate information group. It was the sixth consecutive quarter of decline.
At Camden National Bank, one of Maine’s largest banks, new mortgages are down 50% to 70% from peak times, according to Renee Smyth, the bank’s chief experience and marketing officer.
Banks are in the process of adding buy-down loans to their mortgage offerings.
“This is a win-win for buyers because it helps homeowners make mortgage payments easier,” she said. “If interest rates go down, the homeowner has a better chance of refinancing her mortgage in two to three years.”
With a buy-down loan, for example, a borrower who wants a $400,000 mortgage at 7% for 30 years would pay 5% in the first year, or $2,147 per month. This equates to savings of $514 each month, saving him over $6,100 for the year.
In the second year, the interest rate rises to 6% and your monthly payments are $2,398, saving you $263 a month and $3,156 a year. In the third year, it reverts to the original 7%, or $2,661 per month, with a fixed cap on the remainder of the loan.
The borrower’s savings are derived from the seller’s redemption funds held in an escrow account. Cynthia Veroneau, sales manager at Caliber Home Loans in Portland, said sellers may be willing to put money up front to increase buzz for home sales, especially if sales are slow. , can also be used to pay closing costs.
It could make a big difference for a first-time homebuyer, said Jennifer Tubb, an associate broker at Portside Real Estate Group in Portland. We were unable to finalize the purchase of the condo.
“We were supposed to close at the end of August, but the power company has not finished installing the electricity,” Tabb said.
The client’s original 30-year loan was pegged at 5.625%, but when it expired in October, the mortgage rate had already risen to 7.625%. A client who had to move out of an apartment because the building was sold had to pay for short-term housing and storage of their belongings, adding an unexpected expense.
Electricity has not yet been installed. If she can complete the condo, a mortgage buydown loan will help her rebuild her savings and pay off her debts.Calibur will pay off her loan at an as-yet-unspecified rate. Offers.
Repurchase loans are short-term, but have a more predictable interest rate on the loan. variable rate mortgageIt also made a comeback when mortgage rates started rising earlier this year, according to Craig Mathieson, loan officer at Guild Mortgage in Falmouth.
A variable rate mortgage has a lower initial rate, about 1% lower than the current fixed rate. They are likely to borrow more money because of lower interest rates, attracting eligible mortgage applicants to previously unaffordable homes. and can rise significantly.
“Compared to variable-rate mortgages, there is a cap on how interest rates can rise,” Matheson said. “Buydowns offer more predictability.”