My friend Jay Vorhees at JVM Lending wrote a great blog about the difference between permanent and temporary buydowns – and I think this is information my clients and readers should know about, too! Here is a shortened version of Jay’s blog below, with my two cents added at the end.
A “permanent buydown” is when buyers or sellers pay points (1 point = 1% of the loan amount) to permanently buy down a borrower’s interest rate. In this market, one point will buy down a rate by about 1/4 of a percent. Either buyers or sellers can pay permanent buydown points.
A “temporary buydown” is when the seller pays points on behalf of the buyer to buy down the rate significantly more, but only temporarily. A 3-2-1 buydown, for example, buys down the rate 3% in year one of the mortgage, 2% in year two, and 1% in year three. But, after year three, the rate goes back to the full market rate. For more about temporary buydowns, click here.
Some believe permanent buydowns make more sense because buyers get a lower rate for a full 30 years and, therefore, save far more money overall and qualify for more. But, here’s the issue: nobody keeps their loan for 30 years!
That is especially the case now because so many macro-observers believe that rates will be markedly lower in several months, making a refi into a lower rate extremely likely. So, if a buyer (or seller) pays permanent buydown points, those points will all be wasted once the loan is refinanced (meaning the buyer does NOT get the points refunded).
On the other hand, if a seller pays temporary buydown points, the buyer will get all of the unused points back if he or she refinances before the temporary buydown period ends. This is because the unused temporary buydown points are all held in an escrow account and can thus be used to pay down principal when buyers refinance.
When all is said and done, I do love temporary buydown points but hate permanent buydown points – now more than ever, because rates are going to fall.