Weekly Update 12.28.22 – Temporary Buy Downs


Transcript: So, we’re going to do something a little bit different for this week’s update. We are going to address why our team is not pushing temporary interest rate buy downs. We know those are all the rage throughout the mortgage industry. We know there’s perceived monthly payment savings, but the reality is these products are being marketed in a way by our industry that we don’t believe is ethical and that we don’t believe sets our customers up for future financial success.

We heard recently from some of the mortgage banker associations that state regulators are starting to question the marketing practices surrounding these, and we thought it was a good time going into the new year to just reiterate why we think these are not the good solution for buyers in a rising interest rate environment.

So number one: We don’t think that the savings is actually there. On a temporary interest rate buy down, you are basically paying the difference at closing for what you would have otherwise paid on a monthly basis… now on a temporary interest rate buy down either the seller or the lender is paying it. So generally, that isn’t an immediate cost that the buyers are seeing come out of their pocket. But if the lenders paying for it — we don’t do things for free. Lending never does things for free. So it’s padded into the permanent interest rate. If the seller’s paying for it, then it’s technically padded into the price of the house. So the buyer is paying for it and they’re just prepaying interest. So that’s point one.

Point two: We learned in the 2008 crash that buyers who are put in programs with either fluctuating or graduating monthly payments don’t perform well in the long haul. That’s because when buyers are buying a house, it’s one of the most stressful times in their life. And it is very difficult for all of us to remember the specifics of our loan terms. The vast majority of people are going to be best served with the monthly payment stability. Otherwise, you get used to the first year that lower monthly payment… and you might feel like you can go out and buy a car or something like that. Then all of a sudden when your payment jumps up (and you forgot about it because it was 12 months ago), you can’t afford that particular payment. It’s very similar to what we were doing in the 2008 crash with pay option arms, which brings me to my third point.

Any product that a lender is putting someone in with the basic premise that you can always refinance is generally not great. There is a very small subset of buyers who can benefit from temporary interest rate buy downs or adjustable-rate mortgages. Those don’t change just because rates go up. The vast majority of people need payment stability on the roof over their head, and we learned this in the 08 crash. You can’t always refinance. There are life situations, job situations, housing equity situations that can prevent you from doing that. So it’s a lender’s responsibility to have these conversations with customers and put them in something that is stable and right for their financial situation; not something that just gets them another loan.

And then, yes, in all likelihood the vast majority of our customers are going to be able to refinance in the near future, and we can get them into lower interest rates. But as a worst scenario, they need to be able to know what’s coming. Our industry has no idea what’s coming. Every year around this time, we are inundated with projections for where interest rates are going the next year. But our industry bases projections off the idea that if we’re right, fine; and if we’re wrong, we’re wrong small. Being right 51% of the time the scene is a huge win.  This time last year, we all thought that interest rates weren’t going to increase over 4.5%. And that was wrong because we just don’t know what’s coming over the next year.

And we’ve heard some murmuring out there that that’s kind of a fear-based theology. But it’s just the truth. We have no idea what’s coming. And so, we want our borrowers to be best prepared for whatever comes so that they can just continue making their monthly payments, and then we can pursue a better alternative if one comes along. What we don’t want is … a year or two years from now … is for those same buyers to not have been able to refinance for some reason and suddenly not be able to afford their monthly payments. And that along with the fact that there isn’t any actual savings is why we’re not pushing these temporary interest rate items on everyone.