As a St. Louis mortgage broker, I’ve seen mortgage rates continue to trend downward, despite recent fluctuations. Just a few weeks ago, we were on the verge of seeing rates dip below 6%, especially after the Federal Reserve announced a rate cut. However, a hotter-than-expected jobs report pushed the 30-year fixed rate mortgage back up to around 6.5%, and we’ve seen rates climb closer to 7% since then. This has reignited concerns that we may not have reached the lowest point in rates just yet. If you’re thinking about buying a home in St. Louis, this makes the idea of a temporary buydown worth considering again.

Why a Temporary Buydown Could Be the Solution for St. Louis Homebuyers

Many homebuyers in St. Louis who were able to secure rates below 6% earlier are now facing rates that hover around 7%. This shift has made mortgages less attractive, particularly given the limited availability of competitive lower-cost options like adjustable-rate mortgages (ARMs).

The Problem with Permanent Buydowns

One way to reduce your interest rate upfront is by paying discount points. However, there’s a downside—when you use discount points to buy down your rate, it’s a permanent change. This means if you decide to sell or refinance your home early, you won’t get that money back.

For example, if you pay one mortgage point on a $400,000 loan (which equals $4,000 upfront), you need to keep your mortgage for a certain period to break even on this cost. If mortgage rates drop significantly within a few months and you refinance, that initial $4,000 is lost. It’s an upfront cost that won’t be refunded, making it a risky move if you’re hoping to refinance in the near future.

Enter the Temporary Buydown: A Flexible Alternative

Unlike a permanent buydown, a temporary buydown offers a lower mortgage rate for the first 1-3 years of your loan. This strategy can be particularly useful for buyers in St. Louis who anticipate that rates may continue to drop in the coming months. Here’s the kicker—if you refinance or sell your home early, any unspent funds from the temporary buydown are usually credited back to your loan balance.

For instance, if you have $8,000 allocated to a temporary buydown and decide to refinance when rates drop, any unused funds will be applied to reduce your remaining loan balance. Let’s say you had $7,000 left in your buydown account; that amount would directly reduce your loan balance, potentially lowering your loan-to-value ratio and making your refinance more favorable.

What Are the Potential Risks?

If you’re considering taking out a mortgage in St. Louis right now, here are your main options:

1. Adjustable-Rate Mortgage (ARM): While ARMs usually offer lower initial rates, they come with the risk of rate adjustments after a few years, which could increase your payments if rates go up. Currently, ARMs aren’t widely available, and the rates are often similar to fixed-rate mortgages
2. 30-Year Fixed-Rate Mortgage: Opting for a traditional 30-year fixed mortgage may mean paying a higher rate initially, but you have the security of knowing your rate won’t change. However, if rates drop, you may find yourself wanting to refinance sooner than later.
3. Permanent Buydown: You can pay discount points to lower your rate permanently, but if rates fall shortly after, you might feel like you’ve left money on the table. It’s a gamble, especially in today’s unpredictable market.
4. Temporary Buydown: This strategy lets you enjoy a lower rate for the first few years, giving you time to see where the market goes. The biggest advantage here is flexibility—if rates drop, you can refinance without losing your initial investment since unused funds are credited back.

Understanding the Drawbacks

• ARMs: These come with the risk of future rate hikes, making them less appealing if you’re planning on staying in your St. Louis home long-term, if we happen to get a long-term inflation spike. Plus, their interest rates and not that much lower than 30-year fixed rates.
• Permanent Buydowns: You could lose out if rates continue to decline, as your upfront cost won’t be refunded.
• Temporary Buydowns: The risk here is similar to ARMs in that you’ll eventually face a higher note rate after the initial lower-rate period. However, unlike ARMs, you’ll know exactly what that higher rate will be, with no risk of it climbing further.

Conclusion: Finding the Right Mortgage Strategy for You

In today’s market, navigating mortgage options can feel overwhelming, especially if you’re a St. Louis homebuyer. The good news is, there are flexible solutions like the temporary buydown that can help bridge the gap while rates remain uncertain. Whether you choose a traditional 30-year fixed, explore ARMs, or decide on a temporary buydown, it’s crucial to consider your long-term plans and how likely you are to refinance if rates drop further.

Ready to Secure Your Dream Home in St. Louis?

At Carlson Mortgage, we’re dedicated to helping St. Louis residents navigate the mortgage process and find the perfect loan for their needs. Our experienced mortgage brokers can help you find the perfect loan to fit your needs and budget and will help you make informed decisions about buying a home. Call or text us at (314) 329-7314 or fill out our loan application at www.carlsonstl.com/apply.ved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.