TEMPORARY BUYDOWNS AND AFFORDABILITY

This paper is directed to a neglected aspect of the problem of home ow nership affordability: the impact on affordability of temporary buydow ns. A temporary buydown is an option offered to home buyers to reduce the mortgage payment in the early years of the loan. The borrower allo cates cash up front to an escrow account from which funds are withdraw n monthly to supplement the borrower's mortgage payment. Temporary buy downs are underused partly because of the difficulty of determining wh ether, in any particular case, they will increase affordability. This paper develops a new instrument called the maximum affordable mortgage (MAX) which automatically allocates the buyer's available cash betwee n buydown, down payment and other uses in a manner which maximizes aff ordability for the buyer, subject to whatever underwriting constraints the investor wishes to impose on payment graduation and/or the total size of the buydown. The lender originating the MAX must be able to so lve a complex algorithm at the point of sale, but the complexity is al l behind the scenes. Using a computer, a loan officer can quickly find the cash allocation that maximizes affordability. The power of the MA X in increasing affordability may be enhanced if it is combined with a buyup wherein the lender trades off lower points against a higher rat e.