Rate Buydown Guide for Buyers

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Understanding Rate Buydowns: A Guide for Homebuyers

Navigating today’s real estate market can be complex, but a “rate buydown” might be a strategic option to consider. Let’s break down what a buydown is, how it works, and whether it’s the right choice for you and your family.

What Is a Buydown?

A buydown is a mortgage financing strategy aimed at securing a lower interest rate either permanently potentially spanning your loan duration or temporarily, as the initial years of your mortgage.

Types of Temporary Buydowns

  • 2-1 Buydown: Offers a reduced interest rate for the first two years of the loan.
  • 3-2-1 Buydown: Provides incrementally increasing rates over the first three years, with the standard rate kicking in from the fourth year.

How Does It Work?

  • 3-2-1 Buydown: You enjoy lower payments initially, with a 1% rate increase each year for three years. The seller subsidizes the difference to the lender.
  • 2-1 Buydown: You get a 2% rate reduction in the first year and a 1% reduction in the second year. The full rate applies from the third year, with the upfront cost paid at closing.

Pros and Cons of Temporary Buydowns

Deciding on a buydown involves considering your mortgage amount, initial interest rate, potential interest savings, and future income projections.

Pros:

  • Savings: Temporarily lowers your interest rate and monthly payments.
  • Affordability: May enable you to purchase a home below the listing price.
  • Future Planning: Ideal if you anticipate an income increase or mortgage rates to decline so you can refinance before the rates reach the final rate.
  • Seller Incentive: If a property is on the market for some time, you can request seller credit/concession to pay for this buydown. This will save you more money and typically cost the seller less than accepting a lowball offer.

Cons:

  • Payment Increase: Monthly payments may rise once the buydown period ends.
  • Seller Dependency: Temporary rate buydowns work best when a seller offers seller credit/concession to pay for the buydown.


It’s important to carefully consider these factors and consult with a Certified Mortgage Planning Specialist to determine if a temporary rate buydown aligns with your financial goals and current market options.

Please reach out with any further questions!


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