It’s a known fact that buying a home is expensive. Zillow estimates that the average single-family home in Kentucky is worth $206,517.
This is why prospective homeowners should look into every option to get the lowest mortgage interest rate, even if it means paying for a portion of the loan up front.
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Buyers often consider a mortgage buydown in exchange for a lower interest rate to save money in the long run of their mortgage.
Let’s talk more about mortgage buydowns in Kentucky and if they are right for you.
What is a mortgage buydown?
This is a one-time payment made to a lender to reduce the interest rate on the loan, typically only in the initial few years of the loan.
There is also an option for a permanent buydown for the full term of the loan.
What’s the difference between temporary and permanent buydown?
A permanent buydown lowers the interest rate for the duration of the loan. The up front payment for a permanent buydown can be made by either the seller or the buyer.
In contrast, a temporary buydown lowers the interest rate for a set number of years of the loan term, and the up front payment must be made by the seller. A popular temporary buydown is a 2-1 buydown.
The principal and interest payments are temporarily reduced by a 2-1 buydown, for the first two years of your mortgage.
Paying discount points at closing to lower the interest rate permanently is referred to as permanently buying down the rate.
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How are buydowns structured in Kentucky?
In Kentucky, buydowns can be set up in a variety of ways because they are negotiated.
Lenders frequently employ the 1-0 buydown, 2-1 buydown, or 3-2-1 buydown. The structure remains the same, nevertheless, regardless of the mortgage lender.
The lender will receive points at closing to cover the difference between the conventional interest rate and the reduced rate.
The buyer will benefit from the lower interest rate until the buydown expires, which typically happens after a few years unless it’s a permanent buydown.
When the buydown expires, the homebuyer will be required to pay the standard interest rate for the remaining period.
Are there limits on buydowns?
For both temporary and permanent buydowns, there are specific restrictions.
It’s uncommon to find a lender who will let you purchase more than about four mortgage points. This is because there are restrictions on how much somebody can spend on closing costs for a mortgage at the federal and state levels.
For a temporary buydown, such as the 2-1 buydown, get clarification from your lender. Generally, only principal residences and second homes are eligible for buydowns when buying or refinancing these properties.
Who can “buy down” a mortgage in Kentucky?
In 1978, buydowns were a common occurrence in the real estate industry. Buydowns were created to help buyers migrate from a lower interest rate to cheaper rent when mortgage rates were growing quickly, just as they are today.
Most temporary buydowns are often paid for as a closing cost equal to the buyer’s interest savings by the home sellers. Every month, the loan servicer deducts money from the account to cover the difference between the homeowner’s discounted bill and the entire loan payment.
In order to compete for borrowers in a tough market, several lenders these days are offering temporary buydowns. This is a feature to look for when comparing mortgage lenders.
Likewise, sellers will commonly offer a buydown if they’re having trouble selling their home, in hopes that it will incentivize buyers.
What is the advantage to a buyer utilizing a buydown?
The following are some of the advantages of a buyer utilizing a buydown:
- Early on in your loan’s term, you will make smaller payments.
- Depending on the sort of buydown you choose, you might be able to save money on interest payments for the first two, three, or entire mortgage terms.
- The price of buying the house may be lowered if the seller is willing to contribute in some way to the buydown.
- If you expect your salary to increase, you might not have any trouble eventually paying your increased mortgage payments. You could maybe even purchase a higher-priced home if you’ll have lower payments in the beginning until your income increases
How much does it cost to “buy down” an interest rate?
Discount points are used to determine the price of lowering a mortgage rate. One point equals one percent of the loan balance.
For instance, if a homebuyer is looking to buy two points on a $500,000 mortgage would be $10,000 total.
Are buydowns worth it in Kentucky?
Is a buydown smart in Kentucky? Yes, but this depends on several factors.
When a seller offers to pay the discount points on the buyer’s behalf without dramatically raising the price of the home, buydowns are at their most advantageous.
You must have enough savings to cover the down payment and closing charges while still having a small sum of money left over. If that’s the case, having lower payments in the initial years may be advantageous if you anticipate a significantly higher income.
But keep in mind that buydowns are all about making a larger upfront payment in order to make a larger overall saving. Therefore, buydowns only really make sense if the prospective buyer plans to keep the house for a considerable time.
Calculating the breakeven point is necessary to decide whether a buydown is beneficial. The breakeven point is the period of time it will take for the cost of the discount points needed to reduce your interest rate to be recovered.
Need a buydown? Compass Mortgage has you covered
Have you decided to buy down in Kentucky? Compass Mortgage can help you with favorable rates and a personalized loan process.
To demonstrate our commitment, Compass Mortgage offers the Get Committed program to lock in a favorable interest rate and give you a better fighting chance in a seller’s market. Sellers love to see a fully underwritten loan commitment when you make an offer on their home.
Are you ready to apply for your mortgage? Talk to us and begin an online application today
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