A new promo from Stearns Home Loans sounds almost too good to be true – the lender is offering to buy down your mortgage rate for the first two years without any upfront costs.
Pay attention to that last part, because that might be how the “Smart Start” loan program funds itself.
Stearns Lending CEO David Schneider said in 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
This novel loan program features a lender-paid buydown during the first two years of a fixed-rate mortgage.
During year one, Stearns will reduce your monthly mortgage payment based on an interest rate that is 1.5% lower. So if your 30-year fixed rate happened to be 4.5%, your payment would be calculated based on a rate of 3% for the first 12 months.
This is important because the loan will still amortize based on your note rate, it’s just that Stearns Lending is pitching in the difference.
During year two, the buydown would be just 0.5%, so your mortgage rate would be calcuated based on that 4% rate.
After those two years are up, you simply pay the note rate on the loan for the remaining term, without any further adjustments.
Borrowers participating in the Smart Start program will get an escrow account set up by Stearns. During the promo period, funds from this account are credited to the monthly mortgage payment to make up the difference between the discounted rate and the actual note rate.
What’s the Catch?
While this sounds kind of like an adjustable-rate mortgage, it isn’t. It’s still 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 over time (little time at that).
Of course, as we all know, nothing is really free, and the cost of lowering the rate for the first 24 months has to be recouped somewhere along the line.
My guess, without knowing every detail, is that they offer a slightly higher mortgage rate than what you might be able to get with some competitors, and then once those first two years are up, you’ll pay more each month than what you might have been able to obtain elsewhere.
For example, if they offered you a 30-year fixed at 4.5%, but lender B had a rate of 4% with no special teaser rate the first two years, you’d eventually be paying more for the remaining 28 years of the loan.
This is especially true in a so-called rising rate environment, where 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 possible you could get both a lower rate with Stearns AND snag the special teaser rate for the first two years via Smart Start. That would be a real coup.
You just have to be mindful of prevailing market rates to ensure you aren’t paying more over the long term for the upfront benefit.
Stearns sees it as a way of easing into homeownership, by starting borrowers out with lower monthly payments that still allow them to build equity and get their bearings.
They note that it could be an attractive option for a couple whose household income will increase once their toddler goes to school and they can return to work.
As you might expect, you’ll likely still need to qualify for the mortgage at the regular interest rate, 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 available on 30-year fixed mortgages
- Offered on FHA loans, Fannie Mae’s HomeReady, and Freddie Mac’s Home Possible program
- Note rate may be higher to compensate for savings in year one and two