1/0 Buydown vs. Lender Credit: Two Ways to Help Buyers

Most people have heard of a 1/0 temporary buydown. Still, we’re also using another strategy right now that can sometimes make just as much sense: taking a slightly higher interest rate in exchange for a lender credit.
Not every loan program offers a large enough rebate to make this worthwhile, but some do. And when interest rates are on the higher side, it can be a very effective way to help a buyer keep more money in their pocket at closing. Some loan programs also don’t allow buydowns, and this is a way around that, too!  

How a 1/0 Buydown Works
With a 1/0 buydown, the buyer’s payment is calculated as though the interest rate were 1% lower during the first year.
For example, if the note rate is 7.50%, the buyer would make payments based on 6.50% for the first 12 months and then move to the regular 7.50% payment beginning in year two.
The bank places the buydown money into a buydown account at closing and uses it each month to cover the difference between the reduced payment and the regular payment.
This gives the buyer immediate monthly payment relief during that first year.

How a Lender Credit Is Different
Instead of lowering the payment temporarily, the buyer can sometimes choose a slightly higher interest rate and receive money from the lender toward allowable closing costs and prepaid expenses.
Here is a real example from a loan I locked yesterday.
The loan amount was $825,000.
The buyer had several choices:
7.500%
Standard pricing with no additional lender credit.
7.625%
The buyer could receive approximately a 0.40% lender credit, or:
$825,000 × 0.40% = $3,300
7.750%
The buyer could receive approximately a 0.79% lender credit, or:
$825,000 × 0.79% = $6,517.50
So instead of paying money upfront to obtain a lower interest rate, the buyer is doing the opposite: accepting a somewhat higher payment and receiving thousands of dollars in lender credits at closing. 

Why Would Someone Want the Higher Rate?
This particular buyer loved the idea. They can comfortably afford the slightly higher monthly payment, but they also want to do several things to the house after they move in. More importantly, they believe they may refinance if rates improve over the next 6 to 9 months, and they’ll take advantage of our free refinance-for-life policy on loans above $420K!
Their thinking was simple:
Why spend extra money today trying to get the lowest possible rate if I may replace this mortgage in the relatively near future?
Instead, they preferred to keep thousands of dollars in their pocket today by using the lender credit toward eligible closing costs and prepaid expenses.
 

Which Strategy Is Better?
There isn’t one answer for everyone.
A 1/0 buydown may make more sense for someone who wants the lowest possible monthly payment during their first year of homeownership.
A lender credit may make more sense for someone who:
• Has enough income to handle the payment comfortably
• Would rather preserve their cash today
• Has significant closing costs or prepaid expenses
• Plans to make improvements after buying the home
• Believes they may refinance if rates decline
Years ago, mortgage pricing often let us generate much larger lender credits by moving the rate up 0.50% or more.
Today, we generally aren’t seeing rebates nearly as large. Depending on the loan program and market pricing, however, we sometimes see lender credits approaching about 1% of the loan amount, which can still represent a substantial amount of money.
On an $825,000 mortgage, even a 0.79% credit represents more than $6,500. That is real money. 

Another Tool in the Toolbox
Today’s real estate market requires us to look beyond simply quoting an interest rate.
Sometimes the best financing strategy isn’t necessarily getting the absolute lowest rate available.
It may mean structuring the loan to give the buyer more cash today, a lower payment today, or greater flexibility tomorrow.
The buydowns are a great tool. A lender credit is another.
For the right buyer, taking a slightly higher rate and putting thousands of dollars toward closing costs can be a smart strategy - especially if they expect today’s mortgage may not be their mortgage for the next 30 years. 

Interest Rates
I was talking to a friend yesterday, and I said, UGH, look at the market! Bonds were down 58 Basis points, and we were approaching 8%! An hour later there was a bond auction, and we got all of that back, and a little more. The first couple of hours today were ugly, but we’ve recovered, and rates are better than yesterday and at the best level of the week! Oh, and if I said that’s not saying much, it’s because it’s not saying much! It’s like me saying I lost a pound on Tuesday after gaining 4 over the weekend! The positive part is that maybe we have stopped the bleeding!  

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the low  7’s –
• Conventional (≤ $832,750): in the 7’s
• High-balance: in the 7’s
• Jumbo: In the 7’s
• Bridge Loans: 8.290%

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
• DSCR loans (15% down)
• Buydowns Available (3/2/1, 2/1, 1/0)
• Private Money loans – Hard Money  
• Construction Loans
• 203K loans
• Commercial Loans
• Fix and Flip Loans  

Rates subject to change without notice.
Condo Update
Good news:
American Beauty Village West: Is FHA-approved but still on Fannie’s Naughty list for now!
Bad news:
Nothing new!    

We love your Non-Warrantable Condo loans!!
Need help checking a condo? Call me, and we can look it up in real time.
Also:
Full California “naughty list” available here:
https://mikemeena.com/non-warrantable-condos/
If you or your clients, friends, or family need guidance, I'm here.

📞 661-291-2222 (Direct)

📞 661-714-6258 (Cell)

📞 661-260-2970 ext. 2222 (Office)

📧 Mike@AugustaFinancial.com

Sincerely,