CHM Blog

Mortgage Buy Downs Have Made a Comeback:

Buying down the mortgage rate makes the home easier to sell and more attractive to buyers

Many lenders across the country have seen a resurgence of the mortgage buy-down, which is a plan that allows potential homeowners to save money on monthly mortgage payments.

A mortgage buy-down is a type of financing that provides lower interest rates for at least a few years of the mortgage. They typically are offered by the home seller or builder who contributes to an escrow account that subsidizes the loan during the first few years.

In a 2-1 buy-down, homebuyers can save on interest rates for the first two years of the loan, but will pay the full interest rate at the time of signing for the third year. A 3-2-1 buy-down operates under the same principle: lower payments for the first three years and full interest for the fourth year of the mortgage.

For example, if a buyer opts for a 2-1 buydown, the interest rates will be 2 percent below the current rate for the first year, and 1 percent below for the second year before rising to the regular, permanent rate. In the event that the market’s interest rates drop by the third year, the buyer always has the option to refinance.

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market.  This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events.  When MBS pricing goes up, mortgage rates or pricing generally goes down.  When they fall, mortgage pricing goes up.  Tracking these securities real-time is critical.  For more information about the rate market, contact me directly.  I’m among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are moving sideways today. The MBS market improved by +73 bps last week. This was enough to decrease mortgage rates or fees. The market experienced high volatility last week.

This Week's Rate Forecast: Neutral

Three Things: These are the three areas that have the greatest ability to impact rates this week. 1) The Fed, 2) Inflation and 3) Treasury Sales.

1) The Fed: Last week's Minutes made it clear that the Fed is frustrated that the markets are NOT buying their message (and are actually hedging against it). This week we have a ton of speeches and it will be interesting to see if the collective message remains the same or if we start to see some cracks in their resolve. Here is a schedule for this week:

01/09 Bostic

01/10 Fed Chair Powell

01/11 Atlanta Fed Business Inflation Expectations

01/12 Harker, Bullard, Barkin and the Fed's Balance Sheet

2) Inflation: On Thursday we get the most important economic release of the week with the Consumer Price Index. Market Expectations are that we will actually see a decrease in the headline MOM reading. The weaker this data is, the better it is for rates. We also get Import/Export Prices on Friday which is also an inflationary data point.

3) Treasury Sales: The following is this week's schedule with Thursday's 30 year bond auction as being the most important of the week for rates.

01/10 3 year note

01/11 10 year note

01/12 30 year bond.

This Week's Potential Volatility: High

This morning markets have a very small positive lean. Volatility has started low but will spike on Fed statements and Thursday's economic data.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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