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Another unique Family Mortgage product
Never heard of a Step Ladder mortgage? That is because Family Mortgage coined the term as a way to introduce you to the advantages of this unique product. In industry lingo, it is often referred to as a 2/1 temporary buydown.
A temporary buydown is a reduction in the interest rate you actually pay on your loan for a stated period of time. For example, a builder or seller might offer to provide the buyer of his house funds for a "2-1 Buydown." If the interest rate which the borrower agrees to pay on his or her fixed rate mortgage note at closing is 6.75%, then a 2-1 Buydown will mean that the borrower will actually make monthly payments for the first 12 months at 2% below this "note rate," or at 4.75% in this example. For the following 12 months, payments would be due at 5.75%, or 1% below the note rate. At the end of 24 months, the borrower would make payments at the note rate of interest, 6.75%, for the remainder of the loan, thus creating a “Step Ladder” effect.
Again, a 2-1 Buydown offered on a 6.75% loan, would mean that payments are made by the borrower as follows:
1st 12 months Payments at 4.75% interest
2nd 12 months Payments at 5.750% interest
Remaining Term Payments at 6.75% interest (years 3-30 on a thirty year loan)
The builder or seller will pay a sum to the lender, in this example, equal to the amount of money the lender is not receiving from the borrower in interest in order to "fund" the buydown. In the above example, this would be enough money to supplement the interest difference between the payment at 4.75% and 5.75% and the actual payment due at 6.75%. This is generally about 2.50 discount points or $5,000 on a $200,000 loan.
There are two other ways that the buydown can be structured. If the builder or seller are unfamiliar with how a buydown works or lukewarm to the idea, Family Mortgage can pay it for you as an alternative. Here is an example of how this would work; let’s say the current 30 year fixed rate is at 6.75%. Similar to how a No Closing Cost loan works, if you are willing to accept a slightly higher interest rate than the current market rate, the lender pays us a commission in the form of discount points. We use this commission (called the yield spread) to pay the cost of the buydown. Typically, you would be taking a rate approximately ¾% higher than market to get a commission equal to the cost of the buydown (2.5 discount points or $5,000 on a $200,000 loan). So using our same example above, here is how it would look with a market rate of 6.75%:
1st 12 months Payments at 5.50% interest
2nd 12 months Payments at 6.50% interest
Remaining Term Payments at 7.50% interest (years 3-30 on a thirty year loan).
The advantages to doing it this way are as follows:
- You may be able to negotiate a reduction in the sales price of the home as an alternative. As mentioned above, the cost of this buydown will be about 2.5 discount points or $5,000 on a $200,000 loan.
- You may be able to negotiate for the builder or seller to pay closing costs as an alternative to funding the cost of the buydown.
- If you’re not planning on staying in the home longer than 5 years, you come out ahead under this plan. Check it out on our loan calculator.
- Much lower monthly payments on the front end of the loan when you need it most. As your income grows later, you will be able to afford the payments as they increase.
The other way to accomplish a buydown is to have the builder/seller pay for half the cost and Family Mortgage pay for the other half. In our example above, the numbers would look as follows:
1st 12 months Payments at 5.125% interest
2nd 12 months Payments at 6.125% interest
Remaining Term Payments at 7.125% interest (years 3-30 on a thirty year loan).
This works better for lower loan sizes, let’s say under $200,000 because as loan sizes increase, the rate has to increase less to make the same commission from the lender. So translated, this means that the higher the loan amount, the easier it is for Family Mortgage to pay the cost of your buydown without a substantial increase in your interest rate. If the loan amount is smaller, we are better off approaching the builder/seller about at least splitting the cost
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