Lender creates and funds an escrow account that’s used to cover the difference between the full monthly mortgage payment and the payment with the reduced rate until the buydown expires.
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Rocket Mortgage will provide temporary two-year interest rate buydowns to low-income homebuyers that the Detroit-based lender says could be particularly helpful to first-time homebuyers who might otherwise be stretched thin.
The “Welcome Home RateBreak” 2-1 buydown reduces a buyer’s mortgage rate by 2 percentage points in the first year of the loan and by 1 percentage point in the second year, producing $5,800 in savings on a $250,000 loan, Rocket said.
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Bill Banfield
“Many buyers fear being stretched too thin during the early years of homeownership, especially as they consider the cost of new furnishings and special touches to make the new home their own,” Rocket Companies Chief Business Officer Bill Banfield said in a statement Monday. “By lowering the interest rate for the first two years, ‘Welcome Home RateBreak’ provides financial breathing room, giving consumers the confidence to enter the market and make their homeownership dreams a reality.”
To qualify for the temporary buydown, homebuyers can’t make more than 80 percent of the area median income (AMI), and must be purchasing a single-family home. Fannie Mae’s HomeReady and Freddie Mac’s HomePossible loan programs allow homebuyers making no more than 80 percent of the area median income to put down as little as 3 percent down.
To reduce the borrower’s monthly payments for the first two years, Rocket Mortgage funds an escrow account that’s used to cover the difference between the full monthly payment and the reduced rate until the buydown expires. Homebuyers remain on the hook for taxes and insurance premiums.
Temporary buydowns surged in 2022
Homebuilders have been using permanent mortgage rate buydowns to boost sales of new homes, and lenders like Guaranteed Rate also allow sellers to pay points to lock in a discounted mortgage rate that real estate agents can cite in co-branded marketing materials.
According to research by Black Knight Data and Analytics, as mortgage rates surged in the fall of 2022, about 70 percent of homebuyers were opting to pay points to permanently buy down their rate.
While less popular, temporary rate buydowns can be funded by the borrower, the lender, the borrower’s employer, the property seller “or other interested parties to the transaction,” according to Fannie Mae.
The nation’s largest mortgage lender, United Wholesale Mortgage (UWM), introduced temporary rate buydowns in the second half of 2022, helping fuel a resurgence.
According to a Freddie Mac research brief, temporary rate buydowns surged in the second half of 2022, accounting for more than 6 percent of loans funded for the first time since 2008. Nonbank lenders like Rocket and UWM dominate the market, with 12 lenders responsible for 80 percent of temporary buydowns, Freddie Mac found.
Some borrowers opting for a temporary buydown may end up paying more over the life of their mortgage, based on Freddie Mac data from data from June 2022 to June 2023 showing they received rates that were 15 basis points higher on average.
“This trade-off isn’t surprising since the lower initial payments need to be made up by either higher upfront charges, a higher rate, or both,” Freddie Mac researchers said.
Fannie Mae does not allow buydown funds to be used to reduce the mortgage amount for purposes of determining the loan-to-value ratio, and borrowers still have to demonstrate they have enough income to make the full monthly payment when the full rate kicks in.
But temporary rate buydowns can pose uncertainty and risk if a borrower qualifies for a mortgage at the full rate, but then is unable to adjust their spending and has trouble making the full monthly mortgage payment once the buydown period ends, the Federal Housing Finance Agency’s Office of Inspector General (FHFA OIG) reported last year.
Although temporary rate buydowns aren’t new, “the limited history on loans with temporary interest rate buydowns reduces available performance and risk data, making a full risk analysis more challenging,” FHFA OIG said.
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