With the recent increases in mortgage rates, homebuyers are seeing their purchasing power go down as their potential monthly payments increase. As a result, some buyers are questioning if they should wait to purchase a home in hopes that mortgage rates will go down in the future. However, that may not be necessary if you have the option to buy down your mortgage.
What is a Mortgage Buydown?
Buying a home can be expensive, but with mortgage buydown agreements, it’s possible to get lower interest rates and save money in the long run. These financing deals involve paying points at closing, which cover the cost of decreasing your loan rate from its standard value down to an attractive new level – whether temporarily or permanently, depending on what type of agreement you have set up with your lender.
Permanent Mortgage Buydown
A permanent mortgage buydown allows homeowners to reduce their monthly payments over the life of the loan by paying fees upfront. Effectively, it’s a strategy for locking in lower interest rates and making housing more affordable long-term.
Temporary Mortgage Buydown
A temporary mortgage buydown will keep the interest rates low for a certain period of time, which will eventually increase. There are different structures for temporary mortgage buydowns, like 3-2-1, 2-1, 1-1-1, and 1-0 buydowns.
- 3-2-1 Buydown: payment rate 3% lower than the note rate for the first year, payment rate 2% lower than the note rate on the second year, and payment rate 1% lower than the note rate the third year on a new loan
- 2-1 Buydown: payment rate 2% lower than the note rate for the first year and a payment rate 1% lower than the note rate for the second year on a new loan
- 1-1-1 Buydown: payment rate 1% lower than the note rate for the first three years on a new loan
- 1-0 Buydown: payment rate 1% lower than the note rate for the first year on a new loan
How much does it cost?
Taking advantage of mortgage points is a great way to reduce the interest rate on your loan and save money. For example, if you have a $500,000 loan with an interest rate of 6%, buying one point worth 1% of that amount (or $5,000) can bring it down by 0.25%; in this case, from 6% to 5.75%. Of course, it is important to keep in mind that not all lenders offer the same rates for these discount points, but they are always worth considering when looking into loans!
Who can purchase a mortgage buydown?
The home buyer, sellers, and builders can purchase discount points to help lower the buyer’s interest rate.
- Homebuyer: If this is the case, this will be negotiated between the homebuyer and their lender.
- Seller: If a seller is looking to sell and move fast, they may offer to buy down the mortgage rate as an added incentive for the homebuyer to purchase their home.
- Builder Closing Cost Incentives: Some homebuilders may provide financial incentives for buying a newly built home by them; you can use the funds for closing costs and/or buying down your rate.
Is it Worth it?
Purchasing a home can be a costly endeavor, but there’s an opportunity to save money in the long run with mortgage buydowns. If you have enough savings set aside for your downpayment and closing costs, as well as extra cash for discount points, then buying down your mortgage could prove beneficial by lowering interest rates over time. It’s important to weigh cost vs. reward, though; if you don’t plan on owning the property until it reaches its breakeven point (the amount of time needed to recoup the cost), this may not be worth considering due to out-of-pocket costs upfront.