Tough financial times call for creative financing. Historically high mortgage rates and a cooling housing market have caused buyers and sellers to look for novel ways to stretch their dollar and seal a deal.
Buyers, scared by lofty mortgage rates that threaten to add hundreds of dollars to their monthly housing bill, are seeking out mortgage buy-downs as a way to trim some of that excess. Sellers, desperate to unload homes, are often willing to help out.
Simply put, a mortgage rate buy-down is upfront money, often paid by the home seller (builders and lenders can also front the cost), to “buy down” the interest rate on the buyer’s loan for a period of time. This temporarily eases a buyer’s mortgage woes.
But just how practical are mortgage buy-downs for homebuyers?
We reached out to real estate experts for insight into the benefits and drawbacks of a mortgage buy-down. Here’s what they had to say.
Pro: Lower monthly bills
There are different types of buy-downs, but all of them lower your interest rate.
“While these funds are temporary, they immediately lower buyers’ monthly payments, making homeownership more affordable in the short term,” says Shri Ganeshram, who works with real estate investors on financing as CEO of Awning.com in San Francisco.
Con: When the buy-down expires, regular payments may come as a shock
One of the biggest downsides of a buy-down is that it’s temporary. A buy-down will offer homebuyers a lower monthly mortgage payment for a set period of time, typically one to three years. But once the buy-down expires, your bills could become a lot heftier.
“When the initial buy-down period ends, your interest rate may reset to a higher rate than before,” says Shaun Martin, owner and CEO of We Buy Houses in Denver.
If this does happen, it may defeat the purpose of the buy-down and potentially lead to more costly payments down the line. It’s a risk that buyers have to consider and should discuss with their lender.
Pro: They can provide cash flow for repairs or furniture
As every homeowner knows, moving into a new home—no matter how perfect it might seem initially, and no matter how many furnishings you already have on hand—often entails a series of unexpected fixes and furniture buys. The break you’ll get on your mortgage bill courtesy of a buy-down can leave you with some cash on hand.
“Buy-downs can be especially valuable for investors or owners who need to make repairs to the home or furnish it,” Ganeshram points out.
Con: Not all lenders offer buy-downs, and terms vary
Buy-downs are not offered universally, and when they are offered, one lender’s terms might differ considerably from another’s in the same region.
“Not all lenders will offer mortgage buy-downs, so you may need to shop around,” Martin says. “Additionally, the terms of buy-downs can vary from lender to lender, so it is important to do your research and find one that best meets your needs.”
Weighing the pros and cons
Whether or not a buy-down is right for you might also depend on your timeline and how long you plan to live in the home.
“If you’re planning on selling your home in a few years, a buy-down is a smart move,” says Emmanuel Guignard, senior mortgage broker and director of Loanscope. “But if you don’t have a steady income and are planning on living in the house long term, you may struggle to make the repayments.”
When making this momentous decision, it’s important to consult professionals.
“My advice is to consult a mortgage professional and understand the terms and conditions of the buy-down, including the buy-down period, the increase in payments after the period, and the costs associated with the buy-down before making a decision,” Ganeshram says. “Ask them to do a calculation of how much you would save on the monthly payment in total versus how much they are asking you to commit upfront.”
Buy now, pay later is great in theory. But in practice, it depends on how much you need to pay back and whether you have the cash to cover it.
For this and related articles, please visit Realtor.com