Mortgage Buydowns: 4 Things You Need to Know

Mortgage Buydowns 4 Things You Need to Know

Buying a home can be a stressful process for any family. One aspect of the home buying process that proves to be the most difficult is comparing mortgages and interest rates. Many people assume that the interest rate they’re given by their lender is set-in-stone. However, there are a few options home buyers can take advantage of, one of them being a mortgage buydown. 

 

1. WHAT IS A MORTGAGE BUYDOWN?

A mortgage buydown is a way for a buyer/borrower to lower their interest rate for the first few years by purchasing points, commonly referred to as “discount points” or “mortgage points” in exchange for a lower interest rate. These points are a one-time fee paid upfront by the buyer or paid as a credit by the seller at closing. The most common buydown is a permanent buydown, when the interest rate is permanently reduced to a specific rate in exchange for purchasing points at closing.

2. WHAT IS A 2-1 MORTGAGE BUYDOWN?

A 2-1 buydown is a discounted interest rate for the first two years of a loan. The first year would yield a 2% interest rate reduction, then a 1% reduction in the second year, and finally the actual rate would take effect in the third year. A 3-2-1 buydown is structured the same way as a 2-1 buydown, however the first year, the home buyer would receive a 3% interest rate reduction, following a 1% increase annually for the next two years before arriving at the actual interest rate in the fourth year. 

3. WHEN SHOULD I USE A MORTGAGE BUYDOWN?

Even though they can be fairly common, mortgage buydowns aren’t for every home buyer, however, there are a few ways to tell if a buydown is right for you.

Plans to Refinance

Before buying a home, if you have plans to refinance or sell your home in the near future, a mortgage buydown can be a smart move. By paying lower monthly payments on your mortgage for the first few years, you can maximize your returns from selling or refinancing. 

Increase in Income

If you’re anticipating an increase in your income, a buydown can be a great way of buying some time towards higher monthly mortgage payments. 

 

4. WHAT ARE THE BENEFITS OF A MORTGAGE BUYDOWN?

Interest Savings

If you’re looking for a way to save on interest rates, a mortgage buydown can be a great option for you to consider. If the rates you’re presented with are too high, you can buy yourself a few years with a lowered interest rate before selling or refinancing. 

Offsetting New House Costs

The initial period after buying a house can often be the most expensive. Completing any renovations or furnishing your new home can take a real bite out of your bank account. Saving money through a lowered interest rate can soften the costs of buying a new home. 

 

CONCLUSION

 

The goal of a mortgage buydown is to save money in the short term when purchasing a home. New homeowners can use buydowns as a tool to ease into their mortgage payments and offset initial home-buying costs, while experienced home buyers can keep their payments low if they plan on selling or refinancing. Using a mortgage buydown can be a very effective way to structure your loan plan.

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