The benefits of temporary buydowns

Dream job? Check! Good relocation package? Check! Better off financially? Ouch. Maybe not.

If you are a relocating employee right now, then you're likely looking at some increased mortgage rates. Mortgage rates have not been this high in 20 years. Recently, the rate on the popular 30-year fixed-rate mortgage went over 7% and some expect a potential peak at 8.75%, and believe that rates will remain at least at 6.5% heading into the spring 2023 buying season. Through the first 9 months of 2022, the average fixed mortgage rate has climbed from 3.2% to 7.1%, creating mortgages that many relocating employees cannot afford (or have no desire to take on). 

This situation has many mobility programs reconsidering their options for supporting the home purchase process, looking for ways to make transitions a more attractive decision. One of the things that an employer can do is to offer a temporary buydown. This mortgage financing technique allows the buyer to reduce the mortgage interest rate, thereby lowering monthly payments, for a temporary period of time. The reduction in the rate can be subsidized by the builder, seller, borrower...or the company.

Let's consider a couple of examples on a $400,000 loan amount:

A 1-0 buydown on a 7.625% interest rate, has the borrower paying:

• 6.625% for 12 months (year 1)
• 7.625% for the remainder of the loan (or until refinanced) 
• This creates a $269.93 difference per month for the mortgage payment and would cost the company $3239.16

A 2-1 buydown on a 7.625% interest rate, has the borrower paying:

• 5.625% for 12 months (year 1)
• So in year 1, this creates a $528.54 difference per month for the mortgage payment and would cost the company $6342.48 in year 1
• 6.625% for 12 months (year 2)
• So in year 2, this creates a $269.93 difference per month for the mortgage payment and would cost the company $3239.16 in year 2
• 7.625% for the remainder of the loan (or until refinanced)
• This in total for the 2 years would cost the company $9,581.64

Note that applying a temporary buydown does not prohibit the mortgage from being refinanced in the future if (and when) rates come back down. With many expecting mortgage rates to rest at a lower rate over the next 2 years, those moving now and getting into a high rate will be looking to refinance those mortgages not too far down the road in all likelihood. But this kind of help today might help an employee overcome their reluctance to move and reduce their concerns around cost of living.

Compared to a typical mortgage subsidy, the temporary buydown is also less expensive to the company. It also works a bit differently than a company covering a "discount point", something a company can also consider doing in addition to or in lieu of the temporary buydown. In a recent post, Plus's CEO Susan Benevides explained how discount points work. Paying a "discount point" lowers the interest rate slightly in exchange for an upfront fee, lasting for the life of the loan. It's a different approach that has its own pros and cons.

It is hard to say how long rates will remain high before they come down to the point of people refinancing. According to this CNN article by the end of 2023, rates are expected to be around 5.4%. While the Federal Reserve continues to raise rates, which has caused mortgage rates to go up, reduced demand among borrowers could also result in more competition among lenders, which could lead to a decline from the current level. We are seeing the housing market starting to slow in many places with prices falling from peaks. If the economy worsens and unemployment increases, it could also push rates lower. 

The reality at the moment however is that your relocating employee will pay about $710 more a month on a $300,000 mortgage than you would have if they had secured one in January. Whether you choose to offer discount points or temporary buydowns, either or both would help your relocating employees in their home purchase journey!