Mortgage purchase strategy - Lender paid temp buyout & Refi in 6mos?

Question

I had a creative lender pitch this to me, it has a lot of moving parts, but considering where we are at with mortgage rates, the logic makes sense to me.

Essentially they broker a lender paid temporary rate buydown, then refinance in 6 months before (or within the first year) before the one year temporary buydown ends. To a better rate. Which with everything were seeing, it seems highly unlikely we won't be lookiing at significantly better rates in 6+ months. They also said if I refi with them, they'll waive lender fees.

Worst case scenario, rates don't go down and I have a 6.125% FHA loan, which isn't terrible in todays rates and I can still refinance at some point.

Is there something I'm missing? Anything I should look out for with this?

Or is it a fantastic strategy given the climate.

------The mortgage brokers words:

FHA Lender Paid Temporary Buydown with 3.5% down, with this option your full rate would be roughly 6.125% (no cost associated to it) however, for the first year we as your lender would pay for the rate to be 5.125%.

If you lock your rate in with us before the end of the year (which you would be) we will waive our lender fees on a refinance for you when that time comes. In the event that you chose to do the temporary buydown we would ideally aim to refinance you before reaching the full rate of 6.125%

--------

My numbers:

Credit Score: 703

Home Purchase price: $629,900

Loan Type: FHA 30 YR Fixed Rate

3.5% down

Jay Hurst · Answer

The "if you refiance with them" pitch is just that a pitch. Honestly, kind if a red flag for how honest a lender is. The reality is that most costs on a mortgage are NOT controlled by the lender but are third party fees. and cannot be "waived"  The actual fees a lender controls they simply pay with what is called premium pricing. That just means the lender charges a slightly higher rate then you might qualify for and uses some of that additional premium to pay the fees. That practice in of its self is not bad and can bet the best option for a borrower BUT anyone can do it, not just the lender who did your purchase mortgage. so again, it is just a sales pitch.

And if you are very sure that rates will be "significantly" better in 6 months then they are now (you can also make billions trading bonds if you know for sure) then why would you pay for the buy down now?  To just have a lower rate for 6 months? You can do that math and the buy down will not pay back in 6 months.

Logan Loughmiller · Answer

@Patrick Roberts Thanks for that info!

After yours and others input here I think I'm just going to take the lowest FHA rate I can find - currently 5.5%/5.875% APR and refi as soon as I can. It makes sense to have that lower rate safety net.

I was curious about one of the things you said - "mortgage insurance (MI) on FHA loans is permanent unless you put down 10%+".

I thought mortgage insurance was permanent on FHA loans for the life of the loan, regardless of down payment amount?

Patrick Roberts · Answer

Nope. If you put down 10% or more, then monthly MI can be cancelled after 11 years. If you put down less than 10%, then it's permanent. That being said, in 98% of cases, if you're putting down 10% with a 700+ FICO, you're better off with a Conventional loan regardless, so kinda a moot point.

Patrick Roberts · Answer

Yeah, because all of the temporary buydowns over the past 2-3 years have worked out so well "since rates are coming down next year." Been hearing that since 2022. "Marry the house, date the rate" lol.

If you get another FHA loan, you will have to pay UFMIP again. This is 1.75% of the loan amount. You will get a partial refund on the current UFMIP that you are going pay at the current closing, but it will not be a full refund. I seriously doubt the lender credit will cover this delta in UFMIP and also the lender fees. It also wouldnt surprise me if the "lender credit" you will get is the partial refund of the UFMIP. I have seen unethical lenders do this - they call the UFMIP refund a "lender credit" and then gloss over the fact that youre paying UFMIP all over again because it's being added to your loan balance rather than paid for at closing.

Also, monthly mortgage insurance (MI) on FHA loans is permanent unless you put down 10%+, so you will eventually be looking at a third refi at some point to get rid of the monthly MI, which is 0.55%. For simplicity, just add 0.55% to your note rate to grasp the full impact.

If this was my loan, I would ask the lender to apply the credit for the temp buydown toward a permanent buydown instead, then would use whatever you anticipate spending in the next 6 months on a future refi to buy the rate down even more, and let that ride for a while until you build equity in the property and increase your credit score. This would likely get you well below the current 6.125% youre being quoted on the fully-indexed rate, and would eliminate the need to pay for another loan/closing within a few months. It would also hedge your risk that rates do not drop meaningfully, which is just as likely as rates coming down.

Using your logic that rates are certain to drop enough to justify a refi within the next year, you should be taking a higher, above-market rate in return for a lender credit, rather than paying extra (through the opportunity cost of the lender paid temp buydown) for a lower rate. To be clear, I do not recommend doing this, but that would be the logical move if you believe you will refi in 6-12 months. Get a lender credit to cover all or most of your closing costs now, and then when rates drop, pay for a refi to get the final, lower rate. The risk in this is that rates dont drop and youre stuck with the higher rate for the foreseeable future.

Nicholas L. · Answer

@Logan Loughmiller

not enough info.

what is the cost of the temporary buydown?

and, when you refinance, lender fees are waived... but, i can't imagine the refinance will be $0 other than lender fees.  so, what is that cost?

and, is this a reputable lender?  and do you have other quotes?

Jackie Carmichael · Answer

Here is an FHA / Refi Scenario Analyzer so you can run your own numbers yourself - https://docs.google.com/spreadsheets/d/1XZT2vrsYo0x81Cqmbyy-...

Jackie Carmichael · Answer

Logan — smart that you’re digging into this. A temporary buydown can make sense, but here are the key things to weigh:

Upside:

• You get breathing room the first year with a 5.125% payment.

• If rates drop and you refinance in 6–12 months, the waived lender fees could save a couple thousand dollars.

• FHA loans are assumable, which can be valuable if you ever sell in a high-rate environment.

Risks:

• Rates are unpredictable. If they don’t drop, you’re still at 6.125% — which you need to be comfortable carrying.

• Even with waived lender fees, you’ll still pay third-party costs (appraisal, title, recording) when you refi.

• FHA loans come with ongoing mortgage insurance (MIP), so compare the all-in monthly payment to a conventional option if you could qualify.

• You’re betting on refinancing quickly, but lenders may still have seasoning requirements depending on the product.

Rule of Thumb: Always underwrite the deal at the worst-case — the 6.125% payment plus MIP. If that works for you, then anything you gain from the buydown or a refi is bonus upside.

It’s not a bad strategy in this market, just make sure you’re not counting on a refi to make the purchase affordable.

Are you looking at this property as a long-term hold, or more of a short-term stepping stone until the rate environment changes?

Mortgage purchase strategy - Lender paid temp buyout & Refi in 6mos?

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