What is a Mortgage Buydown? What is a Mortgage Buydown?
With higher interest rates, homebuyers are understandably worried about a higher monthly mortgage payment once they find the right home. It can be frustrating to find the perfect home only to realize it’s unattainable because your monthly payment would be out of your budget.
If you’re looking for a solution that can help make your mortgage payments more manageable, a buydown can help offset the impact of higher rates.
Can a buydown really get me a lower interest rate and monthly mortgage payment?
The short answer is yes. Now for the long(er) answer…
A buydown reduces the buyer’s interest rate and monthly payments for an initial period following the purchase of a home.
This is typically achieved by the seller contributing funds to an escrow account that subsidizes the mortgage for an initial period, resulting in a lower monthly mortgage payment during this period for the buyer. In turn, the seller will usually increase the purchase price of the home to compensate for the costs of the buydown.
Wait, so how exactly does a buydown work?
A buydown can be structured a few different ways, with most featuring discounted mortgage payments for an initial period with monthly payments subsequently increasing back to the fixed rate set in the note for the remainder of the loan.
A 2-1 buydown allows the buyer to obtain a 30-year fixed-rate loan where monthly principal and interest payments are discounted by 2% during the first year, 1% during the second year, and then revert to the initial, non-discounted rate for the remaining life of the loan.
For example, for a $375,000 loan (based on a purchase price of $468,750 and a 20% down payment) with a 6.125% interest rate (6.202% Annual Percentage Rate), the monthly principal and interest payments to be made for a 2/1 buydown would be as follows*:
Year 1
|
12 monthly payments of $1,817.00
|
|---|---|
Year 2
|
12 monthly payments of $2,042.00
|
Years 3-30
|
336 monthly payments of $2,278.00
|
Other buydown structures are similar – a 3-2-1 buydown features a 3% discount on the interest rate during the first year of the mortgage, a 2% discount the second year, a 1% discount the third year, and the initial, non-discounted rate for the remaining life of the loan. Similarly, a 1-0 buydown offers a 1% discount on the interest rate during the first year of the mortgage and the non-discounted, initial rate for the remainder of the loan.
Is a buydown right for me?
As we’ve outlined above, a buydown is a great way to temporarily reduce your interest rate and monthly mortgage payments. If you want to be approved for a mortgage without significantly increasing the purchase price of a home or using up your savings, a buydown could be the right lending solution for you. Similarly, if you have a steady income that has the potential to increase (think about that promotion you’re in line for) a buydown can help you ease into monthly mortgage payments with an initial discounted interest rate.
However, if you don’t plan to be in a home longer than five years, you may never see any of the savings associated with a buydown. It’s also important to note that not all mortgages are eligible for a buydown – you can’t use a buydown to purchase an investment property or for a cash-out refinance and government-backed loans have specific guidelines about how buydowns can be used.
Are there any other ways to reduce my mortgage rate?
A buydown isn’t the only way to reduce your mortgage rate and monthly payments. Buyers can also pay “points” to reduce their interest rate for the life of the loan as opposed to for an initial period of just a few years.
Buyers can also choose an adjustable-rate mortgage (ARM) where the interest rate is fixed for a set period before “adjusting” based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home.
A buydown is just one of the many ways Leader Bank can help make your dream of homeownership a reality! Wondering which option is the best for you? Our team of expert Loan Officers are ready to help. Contact us today!
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* Interest rate and annual percentage rate above are provided as an example only; for information on current rates please contact your Leader Bank loan originator. Sample monthly payments based on loan amounts, interest rate quoted, and the payment of a buydown fee by the seller in the amount of $8,364.00 at closing. Payments do not include taxes, insurance or (if applicable) condominium or HOA fees; your payment will be greater. Additional terms and conditions apply; credit approval required.
