Buydown: A way to reduce your interest rate.
If you’re looking to buy a home soon, you’re probably keeping an eye on the current interest rates. When rates are low, it’s often easier to jump into the homebuying process, but not so much when rates are high. Fortunately, you don’t have to let rates deter you from becoming a homeowner. A temporary Buydown allows borrowers to reduce their effective monthly payment for a limited period of time through a temporary Buydown of the interest rate.
In a temporary Buydown, the effective interest rate that a borrower pays during the early years of the mortgage is reduced as a result of the deposit of a lump sum of money (sometimes called a “subsidy”) into a Buydown account, a portion of which is released each month to reduce the borrower’s payments. The Buydown funds may be provided by the property seller or a builder. We offer temporary Buydown mortgages for a 30-year2 Fixed Rate Conventional, FHA or VA loans on a primary residence.
We offer the following Buydown options:
1-0 Buydown:
Funds are set aside in an escrow account to “purchase” the “down” rate for a one-year period. Here’s how the first year works:
- Year 1: During the first year of the mortgage, the payment is calculated at 1 percent below the 30-year rate. So if you’re getting a rate of 6 percent for the life of the mortgage, the first year you will only be charged at 5 percent. After the first year, the mortgage adjusts back to the original 30-year rate for the remainder of the loan term.
2-1 Buydown:
Funds are set aside in an escrow account to “purchase” the “down” rate for a two-year period. Here’s how these first two years work:
- Year 1: During the first year of the mortgage, the payment is calculated at 2 percent below your total 30-year rate. If you’re getting a rate of 6 percent for the life of the mortgage, the first year will only be charged at 4 percent.
- Year 2: In year two, the payment is calculated at 1 percent below the 30-year rate. So in our above example, you’d pay 5 percent in the second year. After the second year, the mortgage adjusts back to the original 30-year rate for the remainder of the loan term.
Essentially, depending on the Buydown option negotiated with the seller or builder you receive one or two years of lower payments.
Call one of our Mortgage Specialist today to learn more about this special home loan financing option.
1) A Temporary Interest Buydown reduces the interest rate for a set number of months of a 30-year fixed rate loan. The buydown reduces the borrowers monthly mortgage payment for those months.
2) A 30-Year fixed loan has a fixed rate for the entire loan term of 30 years and the loan payments are due each month for 360 months.