Explaining Rate Buydowns

With a rise in interest rates it’s definitely in a homebuyer’s best interest to understand all of their options when it comes to mortgage terms! A rate buydown is becoming an increasingly popular incentive that homebuilders are offering prospective buyers. A rate buydown occurs at closing and is when there is an upfront payment for “discount points” to reduce the rate on a fixed-rate mortgage term.

Rate buydowns can be structured in a few different ways and all lenders have limitations and caps, here are examples of the most common structures:

The first being the most straightforward which is a buydown for the life of the loan. Meaning, that lump sum you pay upfront for discount points on your loan will last for the lifetime of the loan, which in many cases is the traditional 30 year fixed. This requires a greater upfront outlay of cash$, however, because it lasts through the lifetime of the loan, if you are purchasing your “forever” home, it may be the option that makes the most sense.

The second structure is 1-0 buydown. This is a temporary 1% decrease of your contract rate for the first year of your loan. For example you obtain a 30 year fixed mortgage at 6%. Year 1 = 5% ; Years 2-30 = 6%.

Another option is the 2-1 Buydown. Another temporary discount, this option offers discounted rates for the first 2 years. For example you obtain a 30 year fixed mortgage at 5%. Year 1 = 3% ; Year 2 = 4% ; Years 3-30 = 5%.

And lastly is the 3-2-1 Buydown. As you can assume from the prior examples this is another temporary decrease in rates for the first 3 years of your loan. So for example you obtain a 30 year mortgage with a rate of 7%. Year 1 = 4% ; Year 2 = 5% ; Year 3 = 6% ; Years 4-30 = 7%.

These are just a few examples and every person’s situation is different. Your lender will help you walk through the math to figure out if a rate buydown is the best option for you and what you are approved for. If you need a referral please let me know!