Why I Hate “Points” Now More Than Ever (Permanent vs. Temporary Buydowns)
I just read a blog by a mortgage underwriter in which she was explaining how loan officers are stupid because they are not explaining the benefits of “Permanent Rate Buydowns” (vs. “Temporary Buydowns”) to listing agents.
Ironically though, she may be the one who is lacking on the intelligence front.
A “Permanent Buydown” is where buyers or sellers pay points (1 point = 1% of the loan amount) to permanently buy down a borrower’s interest rate. In this market, one point will buy down a rate by about 1/4%. Either buyers OR sellers can pay “Permanent Buydown” points.
A “Temporary Buydown” is where the seller pays points on behalf of the buyer to buy down the rate significantly more, but only “temporarily.” A 3-2-1 buydown, for example, buys down the rate 3% in year-one of the mortgage, 2% in year-two, and 1% in year-three. But – after year three, the rate goes back to the full market rate. I describe the “Temporary Buydowns” in much more detail here: The Beauty of Buydowns!
The underwriter I reference above claims that “Permanent Buydowns” make far more sense because buyers get a lower rate for a full 30 years and therefore save far more money overall and qualify for more (because “Temporary Buydowns” qualify at today’s market rate, and “Permanent Buydowns” qualify at the discounted rate resulting from the buydown).
But – Nobody Keeps Their Loan For 30 Years!
And – that is especially the case now because so many macro-observers believe that rates will be markedly lower in several months – making a refi into a lower rate extremely likely.
So – if a buyer (or seller) pays “Permanent Buydown” points, those points will ALL be wasted once the loan is refinanced (meaning the buyer does NOT get the points refunded).
BUT – if a seller pays “Temporary Buydown” points, the buyer will get ALL OF THE UNUSED POINTS BACK IF SHE REFINANCES before the “Temporary Buydown” period ends. This is because the unused “Temporary Buydown” points are all held in an escrow account and can thus be used to pay down principal when buyers refinance (I again recommend reading the blog I link to above for additional explanation).
So – while the underwriter well understands loan guidelines, she does not understand refi and macroeconomic trends. If she did, she would not be pushing for “Permanent Buydowns” and implying that lenders who don’t are dumb…
In this blog, Why Borrowers Should Not Pay Points To Buy Down Interest Rates, I provide several more reasons why buyers should not pay points to permanently buy down rates.
And – in that blog, I talk about 2009 when many borrowers paid points because they thought rates had bottomed out and because they could get so much “bang for their buck” at the time, as one point bought down the rate 1/2% vs today’s 1/4%. BUT – rates plummeted again, and every one of those borrowers refinanced again – and ended up wasting those points.
TLDR: I love “Temporary Buydown” points but hate “Permanent Buydown” points – now more than ever because rates are going to fall.
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