Temporary buyouts offer steep but short-term savings on mortgage rates.

Borrowers receive a much lower rate for the first year of the loan, which gradually increases until it reverts to a rate that meets the market conditions at the time of the loan.

They are different from standard buyout loans, where the buyer pays an upfront fee to permanently reduce the interest rate on the loan.

Also, unlike adjustable rate mortgages, these loans are reset to a fixed rate.

The buyer is usually not responsible for the cost of the temporary buyout.

Home sellers, lenders and builders can use temporary buyouts to win over buyers who are concerned about high interest rates.

They pay the difference between the actual mortgage rate and the rate the buyer pays, stashing these funds in a custodial account that the lender accesses every month.

Dozens of lenders, including Rocket Mortgage and United Wholesale Mortgage, are peddling temporary buyout loans to soften the blow of interest rates that have roughly doubled in the past year.

Homebuilders are also using them to attract buyers.

About 75 per cent of builders surveyed by John Burns Real Estate Consulting in early December said they were paying reduced mortgage rates for buyers, either for the entire term of the mortgage or for shorter terms.

At San Diego-based lender Guild Mortgage, temporary buyout mortgages accounted for less than 1 per cent of its loan volume in the first half of the year. By November, they accounted for more than 10 per cent.

Temporary buyouts don't have a long history.

Before the financial crisis, lenders used them to qualify borrowers for loans they could not afford.

Rules implemented after the Dodd-Frank Act of 2010 required borrowers to qualify for the maximum mortgage rate the loan would reach, rather than a temporarily reduced rate.

Borrowers who opt for a temporary buyout bet that they will either be able to refinance at the end of the term or that their income will rise enough to make the higher payments more manageable.

Some borrowers may become accustomed to lower payments and struggle to adjust once the buyout period is over.

Interest rate relief has become a key tool for homebuilders to prevent current buyers from cancelling their purchases and to make home purchases more affordable for potential buyers.

Builders have increased construction in 2020 and 2021 in response to the surge in demand.

They now have a large backlog of homes under construction, but demand has fallen.

Listed homebuilders tracked by Bank of America reported a 25 per cent drop in net orders in the third quarter compared to the same period last year.

Builders often use incentives, such as interest rate relief, to lower the monthly cost to buyers without cutting the list price.

They try to avoid lowering list prices, which could prompt buyers who signed contracts earlier at higher prices to abandon their purchases, and could increase pressure to reduce prices on nearby comparable properties.