The hottest topic in nearly every conversation about mortgages is interest rates and whether they are going up or down and how to get the best rate. What if I told you that a temporary buydown could get you a lower than market initial mortgage interest rate for (up to) the first three years of your loan? Sound interesting? Here’s what you need to know.
How to buy down an interest rate?
It should come as no surprise that buying a home can be an expensive process. But, there are ways to make it more affordable throughout your homeownership journey. For instance, a temporary buydown can give you the opportunity to reduce your initial effective interest rate by up to 3% depending on the buydown option available. The best part? You don’t have to shell out anything extra because temporary buydowns are financed with money that either the seller or builder agrees to put into an upfront escrow account for the sole purpose of lowering your mortgage interest rate.
An alternative option to buying down your interest rate is to purchase mortgage discount points. These are a popular solution for homebuyers looking to reduce their interest rate over the life of their loan as opposed to a buydown which is temporary. Learn more about discount points here.
What is a rate buydown?
A mortgage rate buydown, also referred to as a “temporary buydown”, is a financing option that allows a seller or builder to put upfront funds into an escrow account to reduce the interest rate on a home loan for up to three years at the start of the mortgage. So, when affordability is top of mind, you don’t have to compromise on landing your dream home.
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Benefits of a mortgage rate buydown
- Lower initial payments. Because a buydown reduces the interest rate on a mortgage temporarily, you could save money on the interest incurred during the buydown period which lowers your overall monthly payment.
- Reduced cost of purchase. When the seller or builder offers to provide funds for the buydown, it may reduce your total cost of purchasing the home.
- Ease into payments. Since a buydown temporarily reduces the interest rate on the first few years of your mortgage, you will have time to adjust and prepare for higher payments.
Why would a seller or builder pay for a buydown?
It’s natural to wonder why a seller or builder would opt to pay for your mortgage buydown as opposed to just lowering their sales price of the home. However, turns out a buydown may be a better financial option for them. Plus, if you are working with a builder, they may not want to risk comparable prices in the neighborhood by lowering the sales price so a buydown would be a more fiscally advantageous option for them.
Types of mortgage interest rate buydowns
Finding a lower interest rate is a priority for many homebuyers, and buydowns are a common solution. The type of temporary buydown you get depends on what your goals are. It’s important to consider things like how long you want to reduce your rate for and by how much.
PrimeLending simplifies the buydown by process to help homeowners find the right option for their home purchase and offers multiple buydown options to suit nearly any situation. Wondering which option is the best one for your future? We’d be happy to talk through all the options with you. Connect with us today.
3-2-1 Buydown
A 3-2-1 buydown is the option with the longest buydown period, reducing the interest rate on a mortgage for the first three years of the loan. It will reduce the effective interest rate by 3% in the first year, 2% in the second, and 1% in the first.
2-1 Buydown
A 2-1 buydown can reduce your interest rate for the first two years of your mortgage. It lowers the mortgage rate by 2% the first year and 1% the second year.
1-1 Buydown
A 1-1 buydown also reduces the interest rate of a home loan for two years. It reduces the interest rate by 1% in both the first and second years of the mortgage’s term.
1-0 Buydown
A 1-0 temporary buydown lowers the interest rate on a mortgage for one year. It reduces the initial interest rate for the first year of the mortgage by 1%.
How much does it cost to buy down my interest rate?
As a borrower, a temporary buydown shouldn’t cost you anything because the funds are placed into an escrow account by the seller or builder. But, if you’re curious and want to crunch the numbers, check out our free temporary buydown calculator.
If you want a personalized cost breakdown of what a buydown may cost for your specific situation, get in touch with us and we can run some scenarios for you.
