Is a buydown smart in Arizona?

Do you dream of owning a home in Arizona but feel like it’s out of reach financially? A buydown might be able to help you make that dream a reality.

A buydown is a financing strategy that involves paying a lump sum at closing in exchange for a lower interest rate on your mortgage. This can result in lower monthly payments and make homeownership easier to obtain.

Let’s explore the pros and cons of a buydown in Arizona and look at what borrowers need to determine if a buydown is the best choice for them in this market.

What is a mortgage buydown?

A mortgage buydown is a financing technique in which an upfront fee is paid to reduce the interest rate on the mortgage loan. 

This fee is typically paid as points, which are a percentage of the total loan amount. By paying points, the borrower can “buy down” the interest rate on their loan, resulting in lower monthly mortgage payments over the life of the loan.

There are two main types of mortgage buydowns: temporary buydowns and permanent buydowns. 

A temporary buydown lowers the interest rate for a set period, after which the rate returns to the original level. An example is the popular 2-1 buydown option. 

A permanent buydown reduces the interest rate for the entire term of the loan.

Mortgage buydowns can be a useful tool for borrowers who want to reduce their monthly mortgage payments, but they can also be expensive, as the upfront cost of the points can be significant. 

As a result, it’s important for borrowers to carefully consider whether a mortgage buydown is a good option for their situation and to compare the costs and benefits with other mortgage financing options.

How are buydowns structured in Arizona?

In the popular 2-1 buydown option, the borrower or seller can pay an upfront fee (a percentage of the total loan amount) to reduce interest by 2% for the first year of the loan and by 1% the second year, thus lowering monthly mortgage payments.

By year three of the mortgage, the interest rate will return to the number that the borrower originally qualified for. 

The specific terms of a mortgage buydown, such as the number of points, the length of the buydown period, and the amount of the interest rate reduction, will depend on the lender and the specific loan product being offered.

Are there limits on buydowns in Arizona?

For a permanent buydown, there are no specific limits on buydowns in Arizona, as the number of mortgage points you can buy is not set in stone. 

It’s uncommon, however, to find a lender who will permit you to purchase more than four mortgage points. 

This is due to the existence of federal and state regulations that limit the amount that can be paid in closing costs on a mortgage.

What is the advantage to a buyer utilizing a buydown?

The advantage for the buyer is that a lower interest rate can result in a lower monthly mortgage payment, and make it easier for the buyer to afford the home. 

This can be particularly beneficial for buyers who expect their income to increase over time, as they can lock in a lower payment while they are still making a lower salary and then benefit from the increase in income as the interest rate adjusts. 

Additionally, buyers who want to lower their monthly payments as much as possible may also use a buydown to get a better rate and make their payment affordable in the short term.

For first-time buyers, a buydown provides the opportunity to recoup some savings and potentially afford a bigger mortgage. 

If it’s not a permanent buydown, borrowers should make sure they have a plan for how they’ll afford the monthly payments once the rate returns to the originally agreed-upon rate. 

Who can buydown a mortgage?

Anyone applying for a mortgage can buy down the interest rate. 

Builders and home developers can buy down the interest rate on a mortgage to incentivize buyers and make their homes more affordable. They do this by offering to pay a portion or all buydown costs as a promotional offer to buyers.

Common requirements for those looking for a buydown include:

• A decent credit score: Credit requirements vary depending on the loan and lender. But in many cases, the higher your credit score is, the better your loan terms will be.
• Proof of income and debt-to-income ratio: Documentation will be required since these items are important considerations. DTI shows how much of your monthly income goes to paying your debt.
• Fixed-rate loan: A 2-1 buydown is available only with a loan that has a fixed interest rate.
• Fees: Beyond the up-front costs, you may also need funds for a down payment and closing costs

Living in Arizona 

Arizona is a state located in the southwestern United States known for its warm climate and beautiful natural scenery, including the Grand Canyon, Sedona’s red rocks, and the Saguaro cacti of the Sonoran Desert. 

The state is a popular destination for retirees and those looking for a warm, sunny climate and outdoor enthusiasts who enjoy hiking, biking, and other outdoor activities.

The real estate market in Arizona has been strong in recent years, with steady population growth and a strong economy driving demand for housing. It’s seen a significant increase in home value, with many areas experiencing double-digit appreciation. 

Is a 2-1 buydown a good idea in Arizona?

As we’ve mentioned, a 2-1 buydown is a type of buydown in which the interest rate is lowered by 2% in the first year and then by 1% in the second year. 

A 2-1 buydown can make a mortgage more affordable in the short term by reducing the monthly payment for the first two years. This can be particularly beneficial for buyers who expect their income to increase over time or who want to qualify for a larger loan by keeping their monthly payments lower. 

Additionally, this type of buydown can also make it easier for buyers with lower credit scores or fewer savings for the down payment to qualify for a mortgage.

Get Committed® with Compass Mortgage 

At Compass Mortgage, we provide home loans with a personal touch. 

Our unique Get Committed® program offers a fully underwritten loan commitment that locks in your interest rate even before you find the property you want to buy. This program provides more peace of mind than standard pre-approvals. 

Don’t miss the opportunity to work with an experienced and passionate team to help you get pre-approved, Get Committed® and find the right loan for you. Apply now or contact us for assistance, and we will help you find your dream home in Arizona with a simple, personalized loan process.