Buyers Guide to Rate Buydowns

Hello!

If you're a buyer trying to purchase in today's market, you will want to know about the benefits of a temporary rate buydown, how they work, which one to select and why it would benefit you and your family.

What is a Temporary Buydown?

A temporary buydown is a mortgage financing technique that allows homebuyers to obtain a lower interest rate for the initial years of their mortgage. The most common types of temporary buydowns are the 1-0 buydown, the 2-1 buydown and the 3-2-1 buydown.

1-0 Buydown:

First Year: The interest rate is reduced by 1%.

Second Year and Beyond: The interest rate returns to the original rate specified in the mortgage contract.

2-1 Buydown:

First Year: The interest rate is reduced by 2%.

Second Year: The interest rate is reduced by 1%.

Third Year and Beyond: The interest rate returns to the original rate specified in the mortgage contract.

3-2-1 Buydown:

First Year: The interest rate is reduced by 3%.

Second Year: The interest rate is reduced by 2%.

Third Year: The interest rate is reduced by 1%.

Fourth Year and Beyond: The interest rate returns to the original rate specified in the mortgage contract.

How Does a Buydown Work?

Initial Payment: In a purchase transaction, the seller contributes the amount needed for the buydown in the form of a selller concession.

Monthly Payments: During the buydown period, the monthly mortgage payments are lower due to the reduced interest rate.

Return to Standard Rate: After the buydown period, the interest rate returns to the standard rate specified in the mortgage contract, and monthly payments increase accordingly.

Benefits of a Temporary Buydown

Lower Initial Payments:

The primary benefit of a temporary buydown is lower monthly mortgage payments (often by a few hundred) during the initial years of the loan. This makes the home more affordable in the short term and help buyers manage their finances better during the early years of homeownership.

Easier Transition:

For buyers expecting their income to increase in the future, a buydown can ease the transition into higher mortgage payments. This is particularly beneficial for individuals early in their careers or those expecting a significant income increase. In addition, based on historical data, we know there will be an opportunity for a refinance in the future so you may be able to reduce your rate and payment if rates drop.

Market Flexibility:

In a high interest rate market, when a seller offers to pay for a temporary buydown, this can help a home sell due to the buyers having a more affordable payment. This also can eliminate the need for price reductions which allows the seller to net more funds at close.

Temp Buydown Pros and Cons

Whether it makes sense to use a buydown to purchase a home can depend on several things, including the amount of the mortgage, your initial interest rate, the amount you could save in interest over the initial loan term, and your estimated future income. How long you plan to stay in the home also can come into play in determining your break-even point.

Which one to select-

It is a good idea to start incorporate this strategy from the time of pre-approval since you will want to be strategic about putting offers in when using this option. Because the buydown is based on cost that the seller will pay, your Realtor and Mortgage Advisor can guide you based on the home you pick and how competitive of an offer you need to have.

I hope this helps clarify how temporary buydowns work and their potential benefits! A temporary buydown can be a valuable tool for managing mortgage costs in the early years of homeownership. By understanding the mechanics and benefits, buyers can make informed decisions about whether a buydown aligns with their financial situation and long-term goals. If you have more questions or want to explore if a buydown is right for you, contact me via email at [email protected] or by phone at 720-501-8971.