Mortgage Rate Buydowns

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Looking to save money on your monthly payments? Mortgage Rate Buydowns are a loan product that can be a viable option. In this guide, we will explore the concepts of temporary and permanent Mortgage Rate Buydowns, explain their benefits, and demonstrate how they can help homeowners save money over time. 

What is a Mortgage Rate Buydown?

A Mortgage Rate Buydown is a strategy used where the borrower pays additional funds upfront to lower the interest rate on their mortgage. It is an arrangement made between the borrower and their lender to reduce their interest rate for a specific period of time or throughout the entire term of the loan. Typically, there are 2 types of Mortgage Rate Buydowns; Temporary and Permanent.

Temporary Buydowns: provide an initial introductory and lower rate for their first year, gradually raising their rate for their buydown period, and once the buydown period has ended, their rate will adjust to the market rate. Not to be confused with an ARM, once the buydown period is ended, the interest rate is known and definite. Typically, the upfront fees for Temporary Buydowns are paid by either the seller or a homebuilder and are offered when interest rates have increased to levels that affect affordability, resulting in a home sitting on the market for long durations of time. There are 3 different kinds of Temporary Rate Buydowns that are commonly used:

• 3-2-1 Buydown: the interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. The buydown period is 3 years. After the third year, the interest rate will adjust to the rate specified in the loan agreement. 
• 2-1 Buydown: the interest rate is reduced by 2% in the first year and 1 % in the second year. The buydown period is 2 years. After the second year, the interest rate will adjust to the rate specified in the loan agreement.
• 1-1 Buydown: the interest rate is reduced by 1% in the first year, with a buydown period of 1 year. After that first year, the interest rate will adjust to the rate specified in the loan agreement. 

Permanent Buydowns: are where borrowers pay upfront fees, known as Discount Points, to permanently reduce the interest rate for the entire duration of their mortgage loan. Discount Points typically cost 1% of the total loan amount and may be used to lower the interest rate by a certain percentage. For example, paying 1 Discount Point may reduce the interest rate by 0.25%. Permanent Buydowns may provide consistent savings throughout the life of the mortgage.