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Is this the saving grace amid rising mortgage rates?

The most popular version emerging is the 2-1 iteration: “In a 2-1 buydown, the interest rate would be reduced 2% in the first year of the note and 1% in the second year,” Idziak said. “So how does that work? The seller basically puts a certain amount of money that’s based on the lender requirements – essentially what their valuing those interest payments at – into an escrow account and then the borrower basically pays a monthly payment over the first two years of the loan that’s reduced. The gap between that reduced interest rate and the note rate is paid out of the escrow account until that escrow account is depleted, which based on the math would be at the end of year two. So that at the start of year three the borrower would be paying the full principal and interest payment based on the note rate.”

Read more: Mortgage buydowns touted as reprieve from soaring rates

In other words, the 2-1 financing lowers the interest rate before it rises to the regular, permanent rate.

Beleaguered homeowners have taken another look at adjustable-rate mortgages as another reprieve from interest spikes. Idziak noted the GSEs allow for co-mingling the two forms of financing, to a fashion: “Fannie/Freddie do allow for temporary buydowns on ARM loans, so long as the buydown period is shorter than the ARM’s initial interest rate period,” he said. “So, for example, on a three-year ARM, the buydown must be structured as a 2-1 buydown with a buydown period no longer than 24 months.  However, some private investors will only allow buydowns on fixed rate loans.”

As to government loans, the attorney added, FHA does not permit a temporary buydown on ARM loans, while VA does.

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