In my previous posts, I referred to Buydown Purchase Plans that Pasadena sellers should be aware of and use to help sell their Pasadena home in this changing real estate market.
Heres a primer on what a Buydown Purchase Plan is:
Buydown purchase plans or ˜buydowns are monetary subsidies given to a Pasadena home buyer to lower his effective interest rate, his monthly mortgage payments and help him qualify for the loan. In times past the homebuilder or seller of the property was generally the party who provided the funds necessary to provide the buydown from sale proceeds. Today, other parties in addition to seller or builder are allowed to participate in buydown plans, including relatives, employers, the buyers themselves, and in some instances investors.
Buydowns have been available for years but were generally permanent buydowns, that is, the buyers overall Interest rate was reduced between 1/2% and 1 % interest for the entire term of the loan. This permanent buydown resulted in the buyer saving $25-50 per month for the entire 30 year term. However, it was very costly to the Pasadena seller and it only resulted in a small decrease in the buyers monthly payments. Temporary buydowns came into being in the late 1970s as interest rates climbed dramatically, putting the payments out of reach for many would be homeowners.
The temporary buydown only reduces the buyers interest rates and payment for a short period of time such as 1-5 years but it reduces the initial payments much more dramatically for the homebuyer. Instead of a $25-50 reduction for the entire mortgage term, the buyers payments could be reduced by as much as $200 per month in the first year, $100 per month during the second year and $50 per month during the third year. This much larger reduction of the buyers payment puts more buyers in the position to be able to qualify for mortgage loans and make the required monthly payments. The temporary buydown is better suited to many Pasadena home buyers today because they will probably only live in their homes an average of five years, nationwide. As the subsidies are withdrawn the payments will rise but so will the average buyers income. Buydown purchase plans have many names such as discount point buydowns, proceed buydowns, pledged account buydowns, interest rate buydowns and many more.
Even though, the interest rates are at an all time low (or pretty close to it) the Pasadena home buyers can benefit from temporary buydowns since they make it easier to qualify for a loan and allow buyers to afford ˜more house, especially in the first few years of the loan.
The important thing to remember is that all buydowns can be divided into two categories, permanent buydowns and temporary buydowns.
- Permanent buydowns will reduce the buyers payment a small amount for a long time.
- Temporary buydowns will reduce the buyers payments a substantial amount for a short time.
Which is best for you as a buyer will generally be determined by the length of time the you expect to live in the home and how much payment you can afford to make.
Fore relocation and community information, please visit Pasadena City Guide.
If I can be of any assistance with your Pasadena Real Estate needs, please do not hesitate to email me or call me at (626)629-8439. Thank you!
Thanks to Jeff Eliass comprehensive guide for detailed information on buydowns.