You may have read the title of this article and asked yourself, "What's the catch" or said to yourself, "There's no way you can do that". I'm here to tell you that it is possible as I use this strategy on my own personal home. This strategy that I'm about to explain is using a conforming Fannie Mae product that has been around for many years. With out of the box thinking, I have been able to use this product to help customers of mine effectively pay off their mortgage without making additional principal payments.
The loan product that I use to accomplish this is a 30 year fixed loan with a temporary buydown.
There are two types of buydown programs: temporary and permanent.
A permanent buydown is where the borrower or seller pays discount points to the lender to have a lower interest rate for the term of the loan. Often a permanent buydown does not make financial sense due to the amount of time needed in that loan to recoup the costs of the buydown.
A temporary buydown is where the borrower, seller, or lender pre-pays interest for the first one to three years in order to have a lower interest rate. The most common types of temporary buydowns are:
3-2-1 buydown
2-1 buydown
1-0 buydown
With a 3-2-1 buydown...if your note rate is 6.5, 4.5 the third year and 6.5, for the first year your interest rate would be 4.5 the second year and 6.5, you would have an interest rate of 5.5 years two through thirty.
Temporary buydowns have been most commonly used by sellers/ builders that are trying to entice buyers with lower than market interest rates for the first few years resulting in a lower monthly mortgage payment.
Why temporary buydowns and the "No Closing Cost Loan" are perfect together?
If your loan amount is greater than $200,000, DNJ Mortgage has the ability to use the commission the bank pays us for originating the loan to pay for the buydown cost as well as closing costs. This gives our customers a better than market interest rate at no cost to them. We can continue to refinance at no cost using a buydown program to maintain the lower than market interest rate.
Example:
Customer has a current loan amount of $250,000 with an interest rate of 6.625 with a one year buydown. This gives them an interest rate of 5.5 after the first year. By refinancing at no cost, they received an interest savings of $2500 in just one year. At the end of the year, they have three options:
Keep the loan and maintain the 6.5
Monthly payment: $2302.69
Monthly savings from current loan payment: $231.05
How it works:
With this program, we (DNJ Mortgage) are prepaying the difference in interest for the first two years between the note rate of 7.25 and the second year, the rate is 6.25 and the 7.25 note rate and be fearful of that or consider it a greater risk. As I explained initially on the buydown program, we can use this program as a hedge against higher rates because the initial rate on this program is about 1% below market rate. Also, you are only in the program a short period (4-6 months). If we see rates starting to trend one way or another, we can get into a lower fixed rate when you refinance. Also, if you desired, you could use all or a portion of the credit towards a permanent buydown and get a fixed product below market for the entire term.
For more information on this product, please don't hesitate to contact me.
