With higher mortgage rates on the rise, buying down mortgage is a temporary reduction to interest rates and can incentivize buyers more when taking out a loan for a mortgage.
What’s a Buydown Mortgage?
A buydown is a way to lower a mortgage’s interest rate by paying discount points when a mortgage is taken out. Discount points are a one-time fee paid upfront and helps lower the interest rate for the term of the loan. This can be a good option for those who plan to stay in their home for a long time and want to save money on interest in the long run. Typically a discount point costs a percentage of the loan amount. One discount points costs 1% of the loan amount.
Who pays for it?
The cost of each discount point depends on how much of a loan is taken out. While buyers are the ones who benefit from a buydown, sellers are able to purchase points for the buyer in order to incentivize the buyer to purchase the home. Similarly, builders can also pay off the discount points to entice the buyer to purchase the home. Buydowns are most beneficial when the seller or builder pays. The majority of buydowns, however, are negotiated between buyers and lenders. Buyers will negotiate a specific number of points and they will gain a lower interest rate.
What’s a Temporary Buydown?
Temporary Buydowns lower the interest rate down to a certain percentage and then each year increases until it returns to its original rate. A 2-1 buydown allows for a discounted interest rate, but only for the first 2 years of the loan’s term. The interest rate would then be 2% lower for the first year and then 1% lower the next. A 3-2-1 buydown allows for a buyer to pay less interest on the mortgage for 3 years after obtaining the loan.
Getting a lower rate is something many buyers want and consider when taking out a loan or a mortgage, however interest rate is just one part of a home loan and buying a home in general. Buyers should be wary to the mortgage closing costs as they can wipeout potential savings from securing a lower mortgage rate. Keeping informed will help a buyer take advantage of mortgage buydowns or discount points and know what all the costs may be.