Is a Buydown Smart in Ohio?
- What is a buydown?
- How are buydowns structured?
- What is the advantage to a buyer utilizing a buydown?
- Living in Ohio
- How much does it cost to buydown an interest rate in Ohio?
- Is a 2-1 buydown a good idea in Ohio?
- Buydowns in Ohio
Are you looking to buy a home in Ohio but don’t know if a buydown is the right option?
There are pros and cons to a buydown, and we’ll provide you with all the information you need to make an informed decision.
Read on to learn if a buydown is a smart choice for you in Cleveland, Cincinnati, Columbus or any other city in Ohio!
What is a buydown?
A mortgage buydown is a financial strategy that can help homebuyers reduce the interest on their monthly mortgage payments.
With a buydown, a lump sum is paid to the lender at the time of closing, which is then used to reduce the loan’s interest rate for a specific period.
There are two types of buydowns: permanent and temporary. The up-front payment for a permanent buydown can be made by the seller or the buyer. For a temporary buydown, the up-front payment must be made by the seller.
This can be a great option for those who want to reduce their interest rate but don’t have the cash to pay for a larger down payment.
For example, a borrower may be able to buy a home with a 3% down payment, which could result in a higher interest rate.
But with a temporary buydown, such as a 2-1 buydown, the borrower can reduce their interest rate by 2% in the first year of the mortgage and by 1% the following year. This can result in significant savings in the early years of the loan.
In the third year of homeownership, the original rate agreed upon at closing takes effect.
Home sellers often will pay for a buydown on behalf of their buyer to entice them to finalize an offer and get their property sold.
Buydowns in Ohio
In Ohio, a law called Homebuyer’s Protection Act (a predatory lending law) came into force in 2007 and protects consumers from abusive lending practices committed on or by non-bank lenders, loan officers and mortgage brokers.
This means that any lender offering a mortgage buydown must adhere to certain guidelines and rules. This ensures that the homebuyer gets a fair and reasonable deal.
How are buydowns structured?
The fees for a buydown are paid upfront to the lender and often at the closing of the home.
The amount of the buydown depends on the size of the loan and the lender. The buyer is responsible for making payments at the previously approved interest rate, once their buydown period is completed.
Buydowns can be a great way to reduce the cost of a loan and are particularly useful for buyers who are looking to purchase a home but don’t have the full amount of money required for a down payment. The higher your down payment, the better the interest rate for which you can qualify.
What is the advantage to a buyer utilizing a buydown?
Factors such as the length of the mortgage, your initial interest rate, the amount you could save on interest throughout the initial loan period and your projected future income can affect whether it makes sense to use a buydown to buy a property.
Your break-even point may also depend on how long you intend to stay in the house.
Simply put, mortgage buydowns allow buyers to lower their monthly mortgage payments during the first few years of their loan.
Living in Ohio
Ohio has a lot to offer, with an excellent school and university system and a reasonable cost of living.
Overall, there are numerous cash flow and appreciation opportunities throughout the state, particularly in locations with increasing population and job growth.
Even in the largest cities in Ohio, you can find affordable housing with a low cost of living. Despite a declining property market, home prices in the Columbus area increased by 9% in the third quarter of 2021.
Prices in other parts of Ohio grew in the third quarter of this year compared to the same period last year:
- Akron, $215,500 (up 14.5%)
- Canton, $181,300 (up 3.4%)
How much does it cost to buydown an interest rate in Ohio?
This depends on factors such as how much your loan is, the type of buydown and the original interest rate.
For a permanent buydown with a 30-year and 15-year fixed-rate home loan, the buydown is 1 point (1%) for every 0.125% rate drop.
But in a temporary buydown, let’s assume you’re borrowing $500,000 with a 30-year fixed-rate loan at 6.75%. You can choose between a 2-1 buydown or a 3-2-1 buydown.
Here’s what the loan breakdown would look like with a 2-1 buydown option:
- First Year: $1,304 at 4.75% interest
- Second Year: $1,459 at 5.75% interest
- Third Year: $1,622 at full 6.75% interest
The buydown fee for this loan would be $5,759.
When considering a buydown, it’s important to look beyond the initial low payment period to determine whether the costs involved in the near term are worth any interest savings you might realize.
Is a 2-1 buydown a good idea in Ohio?
If home sellers are having trouble selling and need to offer an incentive to find a buyer, they might want to think about providing a 2-1 buydown.
Many Ohio borrowers dealing with high mortgage rates and home prices could benefit greatly from a 2-1 buydown.
Apply now for a loan with Compass Mortgage, if you’re debating whether you should buy down your interest rate on your upcoming house.
Go the extra step with Compass Mortgage and our distinctive Get Committed® program which presents the possibility of a fully underwritten loan and a locked interest rate even before you locate the property you wish to purchase.
At Compass Mortgage, we treat you like family and help to finance your home with our simple, personalized loan process.