A new promo from Stearns Mortgages sounds almost too best to be true C the lender is offering to buy down your mortgage rate for the first two years with no upfront costs.
Pay attention to that last part, because that is how the \”Smart Start\” loan program funds itself.
Stearns Lending CEO David Schneider said from a release that the company wants to ensure that higher mortgage rates don\’t deter well-qualified borrowers from attaining their homeownership goals.
How Stearns Smart Start Mortgage Works
- It’s a 30-year fixed-rate mortgage
- That includes a lender-paid buydown during the first two years
- With a 1.5% rate discount in year one
- And a 0.5% rate discount in year two
This novel loan program includes a lender-paid buydown during the first two years of a fixed-rate mortgage.
During year one, Stearns will lower your monthly mortgage payment based on an interest rate that is 1.5% lower. Therefore if your 30-year fixed rate happened to be 4.5%, your payment could well be calculated based on a rate of 3% for the first 12 months.
This is important considering that the loan will still amortize dependant on your note rate, it’s only that Stearns Lending is pitching in the difference.
During year two, the buydown can be just 0.5%, so your type of loan would be calculated based on that 4% rate.
After these two years are up, you merely pay the note rate to the loan for the remaining term, without any further adjustments.
Borrowers participating in the Smart Start program receives an escrow account set up by Stearns.
During the promo period, funds with this account are credited to your monthly mortgage payment to make increase the difference between the discounted rate as well as the actual note rate.
What\’s ingestion Stearns?
- While it sounds kind of like an adjustable-rate mortgage
- It’s merely a marketing gimmick to offer you a cheaper monthly payment upfront
- In exchange for a potentially higher one for that remaining 28 years
- It could make sense in case you don’t plan to keep your mortgage loan or property very long
While this sounds similar to an adjustable-rate mortgage, it isn\’t. It is always a fixed-rate loan, it\’s just that Stearns Lending is offering a teaser rate for the first two years.
This differs greatly from traditional ARM products that have the ability to shoot up to unsustainable payments as time passes (little time at that).
Of course, inevitably, nothing is really free, as well as the cost of lowering the rate for your first 24 months has to be recouped somewhere down the line.
My guess, without knowing every detail, is they offer a slightly higher mortgage rate than what you might be able to get with a bit of competitors, and then once those first two years are up, you\’ll pay more each month than what you might have been able to build elsewhere.
For example, if they offered that you\’ 30-year fixed at 4.5%, but lender B stood a rate of 4% with no special teaser rate the main two years, you\’d eventually be paying more to the remaining 28 years of the financial loan.
This is especially true in a so-called rising rate environment, where then chances are you won\’t be able to refinance to a lower rate in two years if market rates are higher.
Now again, this is just my speculation, and it\’s really possible you could get both a reduced rate with Stearns AND snag the special teaser rate for the first two years via Smart Start. That is a real coup.
You just have to keep an eye on prevailing market rates to ensure that you aren\’t paying more in the long run for the upfront benefit.
Stearns sees getting a way of easing into homeownership, by starting borrowers out with lower monthly payments that still let them do it build equity and get their bearings.
They realize that it could be an attractive option for a couple whose household income grows once their toddler would flow to school and they can return to work.
As you could expect, you\’ll likely still need to entitled to the mortgage at the regular monthly interest, not the starter rate. So you\’ll still be fully qualified.
Stearns Lending Smart Start Highlights
- Mortgage payment reduced during year one by calculating 1.5% rate discount
- Mortgage payment reduced during year two by calculating 0.5% rate discount
- Only positioned on 30-year fixed mortgages
- Offered on FHA loans, Fannie Mae\’s HomeReady, and Freddie Mac\’s Home Possible program
- Note rate may perhaps be higher to compensate for savings in year one and two