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Temporary 2/1 buydown from FHA


jayl72
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NO, NO, NO, NO.

I only have a couple of minutes, but I will try to get an explanation in here.

A 2/1 buydown has to be paid for by the broker/lender. This usually involves increasing the interest rate by at least 1/2% to 1% on the final note. If the prevailing interest rate is at 6% then the 2/1 buydown will be priced at 6 1/2% or even higher. Usually around 2.5 points in yield spread. If Youwere to pay the 2.5 points that is being charged, you could actually lower your rate to around 5.25% instead of 6%.

Indianapolis has the dubious notarity of leading the nation in foreclosures. After research, it was found that some builders were using the 2/1 buydown as a tool to qualify homeowners into a mortgage they otherwise could not afford. That coupled with property taxes running a year behind, creates a HUGE increase in house payments in year two.

Taking a simple $100,000 mortgage, with a 2/1 buydown, using an estimate of $1,000/yr property taxes, the consumer ends up with an increase of $90.00/mo in year two, (on top of the property tax increase of $85.00/mo). Year two, builder has sold the house and moved on. The homeowner now faces an increase in mortgage payment of $175.00/mo. That is what goes on in this market.

Is a builder offering you this plan?

You still need a solution, I am thinking. Let me offer this up. Consider an FHA ARM. You will still be subject to an increase in interest rate, but it depends on the pricing of the 1 year treasury bill. If the interest rate remains the same, you will not have an increase in interest rate. Worse case scenario, the interest rate can increase 1% per year, with a lifetime cap of 5% increase. Pay close attention to the margin. They are offered with both a 2% margin and a 2.5% margin. The margin is added to the index to determine the following year interest rate. Right now, at par pricing, you can get this at 3.5% (much better than the 2/1 buydown), and this will serve the same qualifying purpose.

The amount going to principal is also much higher with a 3.5% or 4% rate (despite the lower payment), so your mortgage balance goes down faster, thereby softening the impact of future interest rate hikes.

I actually have had an FHA ARM since 1992. The start rate then was 4.5% and I have never had to go higher than 6.875%. The beauty is, next month I have a rate adjustment due and my interest rate will fall to 3.875%. Gotta love it.

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the builder is offering this option to me. I do understand that the first year my payment will be lower, 2nd year will go up a little and the 3rd - 30th year it will be just about what i would of paid if i stayed with the FHA 30 year fixed.. it that correct or i'm i a lost soul with all this. they only thing i dont understand is the taxes, why and how and i'm just lost. Here is my loan. 142,300 loan, builder is paying 3% down and all closing cost.

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You have the definitions right and you understand the payment step concept very well.

The part about the taxes go like this. Property taxes are paid for the prior year assessment. One year ago, your property was an empty lot (there was no house to add to the property tax bill. What happened in Indianapolis was the fact that X builder was selling the heck out of this 2/1 buydown. It helped a buyer qualify for the FHA guidelines, because they qualify at year two interest rate, which is lower than the going rate and more important to the homeowner is the final interst rate (years 3 - 30). If a homebuyer cannot quite qualify at regular 30 year FHA rate, this helps them to qualify. In your specific case the qualifying rate will be $43.00/mo less. This amount could make or break an FHA deal, and often times, it will help to get the person in the home. Now enter the property tax scenario. Initial qualifying property tax is very low. (sometimes less than $50.00/yr), After year one, the property has been reassessed and the new property tax is applied and it actually will be around $100.00/mo.. Next thing you know you all of a sudden have an addtional bump to your house payment of not $86.00/mo, but $180.00/mo. By year three, some homeowners are in over there head, and are paying as high as 50- 55% of their income for the HOUSE. That can hurt the pocketbook. If you do this, make sure you know what the property taxes will be, and be ready for it.

I will try to explain this, but is does get a little bit technical........

Someone has to pay for that interest rate buydown. It is paid for on the final interest rate. That is why it is about 1/2% higher. There is thing called yield spread. A broker must disclose it, but the big banks, mortgage banks, and lenders do not. It is commonly used in the no/low closing cost loans. The cost and charges are there, but the consumer does not see them.

We will use a 100K loan at 6.5% final rate to illustrate. Year one, the 2/1 buydown rate is 4.5%. This is approximately $132.00 less per month. That is $1,584.00 for the year. Year two the payment is $64.00 less per month. That totals to $838.00 for the year. This total of $2,422.00 must come from the discount rate. This is equivalent to 2.422 points in yield spread. If the lender were to give you the extra yield spread to apply towards buying the 30 year rate down, you would be looking at a 5% fixed rate for 30 years vs. a 5.5% par rate fixed for 30 years, or a 6.5% final rate on a 2/1 buydown. That is the reality of these programs. That is the reason I do not endorse them. The discount points can be better utilized, and still serve the effect on getting the homeowner into the home. It is money not very well spent. The two discount points to buy the rate down to a permanent lower fixed rate; I can show a good reason for that.

If you do like the lower interest rate "to get used to the payments, you can also obtain an FHA ARM for 3.5% starting rate (up to 18 months before first adjustment), with 1/5 caps. This means the interest rate will not rise more than 1% per year, nor more than 5% total (8.5%) lifetime. I can make a great savings program with the ARM, but it would take up as much blabber as this thread.

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thanks for the info, so if i didnt do the 2/1 buydown my taxes would be about 319 a month (3828 a year) but if I did the 2/1 buydown, you are saying it would be more than that by year 3. Would it double or go up slowing because of the city that i would live in?

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