Buy Down Mortgages | Mortgages Investors Group (2024)

FAQs

Are mortgage buydowns a good idea? ›

Interest savings: When you use a mortgage buydown, you're able to save thousands of dollars in interest during the first few years of your mortgage. Lower monthly payment: A buydown helps you get a lower monthly payment during the first few years, which can help you ease into paying a mortgage.

2-1 Buydowns

With this option, the interest rate would be 2% lower the first year and 1% lower the second. Based on the previous example of a $400,000 30-year loan with a standard interest rate of 5%, the buyer would be expected to pay an interest rate of 3% the first year, 4% the second year and 5% from years 3 – 30.

A lender may allow borrowers to purchase as little as a fraction of a point up to four points. One mortgage point typically costs 1% of your loan and permanently lowers your interest rate by about 0.25%.

Each mortgage discount point usually costs one percent of your total loan amount, and lowers the interest rate on your monthly payments by 0.25 percent. For example, if your mortgage is $300,000 and your interest rate is 3.5 percent, one point costs $3,000 and lowers your monthly interest to 3.25 percent.

Both the buyer and seller can benefit from a mortgage buy down. Concessions offered by the seller paid buydown might help the seller achieve a higher sale price. Furthermore, the buyer benefits by receiving a lower rate and monthly payment for the first two years of the loan without having to pay any points up front.

If you are buying a home and have some extra cash to add to your down payment, you can consider buying down the rate. This would lower your payments going forward. This is a particularly good strategy if the seller is willing to pay some closing costs.

While you do need to be approved for the actual interest rate and payments with a 2-1 buydown, if you get used to the lower payments in year one—and even in year two—it can be hard to adjust your spending levels when your payments rise in the third year, putting you at risk of overspending or not being able to afford ...

Disposing of Buydown Funds

The funds should be credited to the total amount required to pay off the mortgage, or they may be returned to either the borrower or the lender as specified in the buydown agreement. The mortgage is foreclosed. The funds are used to reduce the mortgage debt.

The 3-2-1 buydown can get you through the current interest rate hike, but it can also position you to refinance after the program ends in three years. At that time—as long as your home equity is at least 20%—you can consider refinancing to a lower permanent rate.

Mortgage rate buydowns typically happen in one of two ways: The seller contributes to the buyer's closing costs via discount points, or the seller pays for a temporary rate buydown.

How long does a buydown last? ›

In a 3-2-1 buydown, the buyer pays lower payments on the loan for the first three years. For each of the first three years of the mortgage, the buyer's interest rate would increase incrementally by 1% annually. The full interest rate would apply beginning with the fourth year of the mortgage loan.

The difference between the payment amount of the original mortgage and the total annual savings of the buydown program selected equals the total cost of the buydown.

Consider the following example for a 30-year loan: On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.

Key Takeaways. With a 3-2-1 buydown mortgage, the borrower pays a lower than normal interest rate over the first three years of the loan. The loan interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year; for example, a 5% mortgage would be just 2% in year one.

That said, buying mortgage points might make sense in a few cases: If you plan to be in the home for a long time: Because buying points on mortgages reduces the rate for the life of the loan, every dollar you spend on points goes further the longer you pay that mortgage.

Points can increase your closing costs by thousands of dollars. But it's a high upfront cost that may be worth it if you stay in the home long enough to see savings from the reduced interest rate. Paying extra money upfront could mean tens of thousands of dollars in savings over your mortgage.

How does a seller-paid rate buydown benefit the seller? Raised interest rates can cause price reductions on a seller's home. A buydown is one way sellers can avoid this. It might be cheaper for them to help pay for mortgage or discount points instead of cutting the asking price of their home.

Repaying their mortgage rather than investing the money not only saves the borrower the interest they would have paid on the mortgage, but it also frees up money that otherwise would have gone to monthly repayments.

What are the pros and cons of temporary mortgage rate buydowns? Pros include lower initial payments, affordability, and flexibility. Cons include higher interest rates later, the potential costliness, and the complexity of the process. 5.