Are Mortgage Buydowns A Win-Win Situation Or A Shady Gimmick?
Nowhere besides the Washington, D.C. area is it more obvious that, during the pandemic, people with cushy, salaried jobs used the months of working from home to save up money to buy real estate. With no commuting expenses and no opportunities for dining out and recreational travel, the upper middle class turned those budget items into down payments on new houses, to be supplemented by the proceeds of selling their old houses. Demand for residential real estate skyrocketed, and with it, housing prices. Combined with rising interest rates, it started to look like a perfect storm for another housing market crash. Housing prices will have to become more affordable somehow, but how? Mortgage buydowns are an increasingly popular incentive to get buyers to agree to a sale, but are they riskier than the sellers, builders, and real estate agents who encourage them make them sound? If you are thinking of using a mortgage buydown to buy or sell a real estate property, contact a Washington DC real estate lawyer.
How Do Mortgage Buydowns Work?
In a mortgage buydown, the mortgage lender approves the mortgage loan at a certain interest rate. Another party, usually the seller, lender, or builder deposits money into an escrow account at closing. Over the course of an agreed upon period, the money gets paid out of the escrow account toward the mortgage loan in monthly installments; during this period, the buyer’s interest rate is lower than it appears in the loan agreement. Once the time period (usually one or two years) ends, the interest rate on the mortgage loan reverts to the rate on which the buyer and the lender originally agreed.
Why Do Mortgage Buydowns Have a Bad Reputation?
Mortgage buydowns are not new. Real estate developers frequently use them to give buyers an incentive to buy newly constructed houses. For the developer, it is worth it to float the buyer some money, because they need to sell houses quickly to avoid becoming delinquent on the construction loans they borrowed to finance the building project. Mortgage buydowns tend to be most popular when housing prices are high; they experienced a surge in popularity in the late 1970s. Because the most recent mortgage buydown boom was right before the housing market crash of 2008, some people think of them as just another adjustable-rate mortgage, a temporary solution with disastrous long-term consequences.
Whether you are asking for trouble by accepting a mortgage buydown depends on your overall financial situation. If you have multiple income streams, such as rental income from several real estate properties, then it is less risky to choose a mortgage buydown than if the real estate property in question were the single biggest purchase of your life.
Let Us Help You Today
A real estate attorney can help you think outside the box about how to be able to afford to purchase your desired real estate property. Contact Tobin, O’Connor & Ewing us today for help.