One of our banks just came out with a creative idea, a lender funded temporary buydown to a borrower’s interest rate for the first 2 years of the loan. The first year, the rate is reduced by 2% from the long-term note rate. For the second year, the rate is reduced by 1% from the long-term note rate. Then, beginning year 3 your interest rate and payment revert back to the Note Rate.

In the past when we had a Buyer’s Market we could get the seller to pay for this buydown cost; but since that’s not possible today; we as the lender will pay for it with premium pricing. This means the borrower’s Note Rate and long-term payment rate will be about ½% higher than normal.

So, if the normal rate is 5% the Note Rate on this loan will probably be about 5.50%. But, their interest rate the first year is just 3.50% and the second year their rate is 4.50%. I believe this is a good option for first time home buyers especially or anyone who thinks they will remain in their home for 5 years or less. Or it’s a good option for a household where one borrower is in college for 1 or 2 more years and the lower monthly payment for the first 2 years is beneficial and they can afford a higher payment beginning in year 3.