What is a Mortgage Buydown?

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Mortgage Buydowns are Back: A Way to Save Money

This week the Fed announced another mild interest rate hike planned for February amid continued inflation concerns. Lenders have already reacted to the news as interest rates across the country increased. Longer term, mortgage rate predictions vary widely for 2023. If high inflation continues, expect upper ranges of 8-9%. Conversely, a recession or an unexpected “black swan scenario” may push rates back down to 5-6%. (Source: TheMortgageReports.com)

If you’re in the market as a buyer or seller, a mortgage rate buydown might be an attractive option to get a deal done. We help our clients access the best real estate strategies for their circumstance and provide referrals to qualified mortgage experts.

What is a Mortgage Rate Buydown?

A mortgage rate buydown is a financing technique that allows borrowers to reduce their interest rate by paying discount points at closing. Typically negotiated between buyers and lenders for an agreed loan amount and term, this technique lowers the interest rate for 2-3 years giving the home buyer a lower monthly payment.

The 3-2-1 Buydown Mortgage

Buydowns can also come in the form of a seller concession in order to get a deal completed on better terms. For example, the seller is offering a 2-1 interest buydown on a property to a specific buyer. The seller would pay the discount points to the lender upfront. In exchange, the buyer’s 5.75% interest rate would lower by 2% in the first year, 1% in the 2nd year and return to 5.75% in the third year. This would save hundreds of dollars per month over the buydown period, and keep the buyer protected with a fixed rate over the remainder of the loan. The incremental payment increase helps the buyer to adjust to the higher payment over time, as their salary increases and there is still the ability to refinance when rates go lower.

Sellers interested in faster, more competitive offers can set up a 2-1 or even a 3-2-1 buydown to attract quality buyers who otherwise wouldn’t be able to afford a mortgage at the current interest rate. If you want to know more about mortgage buydowns, contact our office and one of our agents will be happy to discuss this technique or refer you to a mortgage specialist.