Here at Taylor Morrison, we know that buying a home is an exciting and life-changing experience. However, it’s also one of the most significant financial commitments you’ll ever make. Securing favorable mortgage terms is crucial, and two tools that can help you achieve this are rate locks and buydowns.
In this comprehensive guide, we’ll demystify these concepts to provide you with a clear understanding of how they work and how they can benefit you as a homebuyer. Ready to find your new home? Let’s do this!
What is a Rate Lock?
A rate lock is a commitment made by a lender to guarantee a specific interest rate for a certain period, typically between 30 to 60 days. This means that if you lock in an interest rate of, say, 6% for your mortgage, it won’t change, even if market interest rates increase during that lock period. With our Affiliated Lender, Taylor Morrison Home Funding, there are rate lock terms available for up to one year.
What is the Purpose of a Rate Lock?
The primary purpose of a rate lock is to protect borrowers from rising interest rates during the crucial phase between mortgage approval and closing. It provides financial certainty and helps homebuyers budget more effectively.
How Rate Locks Work
When you’re ready to lock in your interest rate, you’ll typically contact your lender or mortgage broker and request a rate lock. You should be prepared to provide necessary information such as your loan amount, loan program, and the desired duration of the lock. Once you lock it, the specified period sets your interest rate in stone.
Benefits of Rate Locks for Homebuyers
1. Predictable Payments: Rate locks provide peace of mind, as you’ll know exactly how much your monthly mortgage payments will be.
2. Protection from Market Fluctuations: Even if market interest rates rise, your locked rate remains the same, saving you money over the life of your loan.
3. Time to Secure Financing: Rate locks allow you to secure financing before closing, reducing the risk of losing out on a property due to financing issues.
Potential Risks or Considerations
1. Expiry Dates: Rate locks have expiration dates. If your home purchase is delayed or your lock expires, you may need to renegotiate terms, and it is possible that the new terms could be at a higher rate.
2. Fees: Some lenders may charge fees for rate locks, so be sure to inquire about any associated costs
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What is a Buydown?
Townes at Westford in Raleigh, NC
A buydown is a mortgage financing option where the borrower or a third party pays additional upfront fees to reduce the interest rate for the initial years of the loan. People often refer to this upfront cost as ‘buying down’ the interest rate.
Types of Buydowns
There are two primary types of buydowns:
1. Temporary buydown: In this type of buydown, the monthly payment is reduced for a specific period through a payment subsidy paid by the lender or seller. Once the temporary buydown period expires, typically one to three years, the payment will remain at the fixed rate for the remaining life of the loan. .
2. Permanent buydown: With a permanent buydown, loan discount fees and upfront interest are paid at the time of closing, providing a lower interest rate for the entire life of the loan.
Purpose of a Buydown
The purpose of a buydown is to make homeownership more affordable initially, which can be especially helpful for borrowers who expect their income to increase in the future.
How Buydowns Work
To implement a buydown, you or the seller pays additional upfront funds to the lender, who then adjusts the interest rate accordingly. This results in lower monthly mortgage payments for the specified period.
Benefits of Buydowns for Homebuyers
1. Lower Initial Payments: Buydowns can make homeownership more accessible by reducing the initial financial burden of a mortgage.
2. Qualify for a Larger Loan: Lower initial payments may enable you to qualify for a larger loan, allowing you to purchase a more expensive home.
3. Financial Planning: Buydowns can help with budgeting, especially if you anticipate changes in your income or expenses in the near future.
Potential Risks or Considerations
1. Upfront Costs: Buydowns require a lump-sum payment upfront, which can be a significant financial commitment.
2. Long-Term Costs: While buydowns provide short-term relief, they can result in higher overall costs if the initial lower interest rate is significantly below market rates.
Market Conditions & Interest Rate Trends
Understanding current market conditions and interest rate trends is essential when deciding whether to use rate locks or buydowns. If interest rates are low and stable, you may not need these tools as much as when rates are volatile.
Future Plans and Goals
Consider your long-term goals. Are you planning to stay in the home for a short period, or is it your forever home? Your plans can influence whether rate locks or buydowns are more beneficial.
Affordability and Budget Considerations
Finally, evaluate your budget and ability to handle potential changes in monthly payments. Rate locks provide stability, while buydowns may only offer short-term relief but could result in higher payments later. No matter what path you take, the experts at Taylor Morrison Home Funding (affiliated lender) are here to help you make the important decisions every step of the way. *
For even more Dollars & Sense content, head to our blog on closing costs here.
Thanks for Reading!
As always, thank you for reading and we hope you learned something valuable from this blog! With the right strategy in place, you’ll be well on your way to achieving your homeownership dreams with confidence.
*Taylor Morrison Home Funding, Inc. (“Affiliated Lender”), NMLS # 8588, 495 North Keller Road, Suite 550, Maitland, FL 32751, Licensed locations: AZ: #0917436 | CA: DFPI #4130023 | CO: Registration #8588, PH# 866-379-5390 | FL: MLD1920 | GA: #52654 | NV: #3938 (branch located at 1820 Festival Plaza Dr., Ste. 220A, Las Vegas, NV 89135 PH# 702-680-1085) | NC: #L-191654 | OR: #ML-4272 | SC: #MLS-8588 | TX: #8588 | WA: #CL-8588 | www.nmlsconsumeraccess.org. Buyer is not required to finance through Affiliated Lender and/or to use such Closing Agent selected by Seller to purchase a home; however, Buyer must use both the Closing Agent selected by Seller and finance through Affiliated Lender to receive certain promoted incentives. Interest rates and available loan products are subject to underwriting, loan qualification, and program guidelines. Other restrictions may apply.
Blog is intended for general informational purposes only and not as an exhaustive comparison of all factors applicable to your personal financial situation. Data used was derived from third-party sources and deemed reliable as of the date obtained, but not guaranteed, offered as investment or tax advice, or independently verified by Taylor Morrison; all information remains subject to change outside of Taylor Morrison’s control. Images do not reflect a racial, ethnic, age or familial status preference. All registered and unregistered marks of third parties used for illustrative purposes only are the exclusive property of the respective owners. © November 2023, Taylor Morrison, Inc.
