Using a buydown to reduce your rate
Temporary Buydowns aren't always a good idea, but they can be a solution for some buyers.
How can you find the lowest mortgage rate in today’s market? Strengthening your credit score, having a good DTI (debt-to-income ratio), and increasing your down payment may all help you qualify for a competitive interest rate. A Temporary Buydown could help to reduce your rate even further.
What is a Temporary Buydown, and when should you use it?
Since the start of the year, mortgage rates have been rising. They’re still below the historical average, making it a favorable time to buy a house. But understandably, today’s homebuyers are looking for ways to counteract these rate hikes and keep their monthly payment affordable.
Presenting a lower offer on a house is one option. Across the U.S., sellers are becoming more flexible to compensate for the drop in buyer demand. Many have been forced to cut their prices. That said, a seller who has lowered their price may not be willing to reduce it any further.
Using option number two—a Temporary Buydown—can make more sense. A Temporary Buydown helps to:
- Increase the appeal of your offer.
- Lower the initial interest on your loan—lowering initial monthly payments.
- Net the seller more overall profit.
A Temporary Buydown is also called a 2-1 Buydown Mortgage (though loan programs and terms may vary). It can be a great option for both new and experienced homebuyers who want to save money on their mortgage. A Temporary Buydown may be compatible with most loan types, including Conventional, VA, and FHA.
When you use a 2-1 Buydown, you’ll get a lower, more affordable interest rate for the first two years of your loan. This may make it possible for you to purchase your dream home sooner. In year three, your payments will be fixed for the remaining life of your loan, removing all uncertainty of future increasing payments.
Here’s what this might look like:
- In year one: The interest rate is reduced 2 percent below the rate on your mortgage note.
- In year two: The interest rate is reduced 1 percent below the rate on your mortgage note.
- In year three: The interest rate increases to the full rate as required by your note, and it stays at this fixed rate for the remaining years.
Reducing an interest rate can help to reduce a monthly mortgage payment—often by several hundred dollars.
Could a Temporary Buydown help get you into a home you love? Let’s discuss your options.
The cost of a buydown must be paid upfront before closing on a mortgage. But by who? A Temporary Buydown is typically paid for by a seller or builder, if constructing a new house. The cash deposit for the buydown is then placed in escrow and used to cover the difference of the reduced rate for the first two years of the mortgage.
Why would a seller agree to buy down your interest rate?
Rather than presenting a lower offer, many buyers are having a higher rate of success by negotiating seller concessions to buy down their interest rate. Essentially, this means asking a seller to pay part of your closing costs in order to close the deal—which can also include appraisals, lender fees, the cost of a buydown, and any other expenses, excluding your down payment.
To cover concessions, a seller won’t discount their home’s price. Instead, they’ll usually increase its asking price by the amount needed to pay for a buydown.
Why would a seller or builder do this? A Temporary Buydown benefits both the seller and the buyer:
- For a homebuyer: A 2-1 Buydown can reduce initial interest, help temporarily lower a monthly payment, and even make it possible to qualify for a larger loan amount and purchase a more expensive house.
- For a seller: Offering incentives like a Temporary Buydown could attract buyers, speed up the sales and closing process, and, ultimately, help to increase profits more than reducing the asking price on a house.
If a seller cuts a home’s price, a buyer will save some, but a seller will lose this profit. But using a Temporary Buydown is more likely to yield greater initial monthly savings for the buyer, as well as greater net profit for the seller. When listing or making an offer on a house, it helps to remember that this is a more beneficial form of negotiation.
While any homebuyer can use a 2-1 Buydown to save, this program can be most advantageous to buyers who’ve had difficulty finding a home in their price range and who expect income to soon increase. A Temporary Buydown can also be used to help a buyer get into a starter home at an affordable price, acclimate to homeownership while building equity, and then eventually trade up to a bigger house.
If you’d like to save on your first two years of homeownership:
A 2-1 Buydown may be the key. Connect with a local Loan Officer to find out if sellers are agreeing to Temporary Buydowns in your area.
This is for informational and educational purposes only and not intended as an advertisement as defined by Regulation Z. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. MAC823-1482702.