Who needs ARMs? Borrowers are paying more up front to secure lower mortgage rates
In light of soaring rates, adjustable-rate mortgages have been getting a serious second look by many as at least a temporary reprieve from hikes. However, another lesser-known tactic designed to ensure mortgage payments are more manageable down the road has emerged amid the mercurial market as an alternative – mortgage buydowns.
Essentially, the tactic involves paying more money up front to secure a lower interest rate on a mortgage. In using the method, borrowers are able to obtain a lower interest rate by paying discount points at closing. Also referred to as mortgage points or prepaid interest points, discount points are a one-time fee paid upfront with an interest rate that is lower for the loan term.
Peter Idziak, an attorney at residential mortgage law firm Polunsky Beitel Green, is a big proponent of the technique – particularly amid a shifting industry landscape – that has gained popularity among prospective buyers and sellers. Idziak said he firmly believes that temporary mortgage buydowns may provide a viable solution to ongoing housing affordability issues.
He said the tactic is now being used increasingly: “Realtors that I speak with have reported that individual sellers are beginning to offer buyers temporary buydowns,” he told MPA. “Borrowers paid by individual sellers are generally offered as a concession to avoid a reduction of the sales price and can signal a housing market where buyers are beginning to regain some control.”
The lawyer also has noticed an uptick in the method among lenders, he added: “In speaking directly with clients, I have seen multiple lenders launch temporary buydown programs with builder partners, and many others begin to explore such programs,” he said. “The goal of these programs is to make new construction homes more affordable to buyers by reducing their interest rate for the first few years of the loan.”
Some of the nation’s biggest lenders have begun to promote buydowns as well. Rocket Mortgage offers a primer on its website. “It’s no secret that purchasing a house is an expensive undertaking,” officials wrote. “When you get a mortgage, you’re not only committing to paying the purchase price of the home – you’re also agreeing to pay for the privilege of borrowing money.”
Buydowns offer a hedge against future rate spikes, the lender suggested: “While it might seem like you can only hope that interest rates are low, despite predicted trends and rate hikes, when you’re ready to obtain a loan, there’s actually something you can do to ensure your mortgage payments are more manageable in the future. By paying more money upfront, you can score a lower interest rate on your mortgage.”
With mortgage rates forecast to continue rising this year, the buydown method is seen by its proponents as a useful tactic to protect one from rate hikes. Rocket Mortgage notes that the cost for each discount point is entirely contingent on the amount the borrower takes out on the loan. Each point a borrower pays is equivalent to 1% of the loan amount, officials explained.
“For example, a mortgage lender may offer a borrower the ability to reduce their interest rate by 0.25% in exchange for a point,” Rocket Mortgage officials outlined. “So, if the borrower is obtaining a mortgage for $400,000 and is offered an interest rate of 4%, paying $4,000 would lower their interest rate to 3.75%.”
Idziak suggested the tactic yields a win-win: “For builders who pay the buydown fee, the programs offer a way to bring buyers back into the market who may feel priced out by the recent increase in both home prices and interest rates.”