What Is a Temporary Mortgage Rate Buydown?

A temporary buydown lowers your interest rate, and your payment, for the first year or two of a loan. After that, the rate returns to the original note rate for the rest of the term. It's different from paying points, which lowers your rate permanently.

How it works

The rate reduction is paid for upfront. That money goes into an account at closing and is used to make up the difference between your reduced payment and the full payment during the buydown period.

Common structures:

• 2-1 buydown: the rate is 2% lower in year one, 1% lower in year two, then the full rate from year three on.
• 1-0 buydown: the rate is 1% lower for year one only.
• 3-2-1 buydown: three years of reduced rates, though less commonly available.

Availability depends on the lender and loan program.

Who pays for it

The funds can come from:

• The seller, as a concession, often in slower markets
• The builder, on new construction
• The lender, in some promotions
• The buyer, though this is less common since permanent points may make more sense in that case

Seller and other interested-party contributions are subject to program limits.

An example

These numbers are for illustration only. On a $600,000 loan with a 7% note rate:

• Full payment (principal and interest): about $3,992
• Year one at 5%: about $3,221, saving roughly $771 a month
• Year two at 6%: about $3,597, saving roughly $395 a month
• Year three onward at 7%: $3,992

The total buydown cost is roughly the sum of those savings, about $14,000, which the seller might pay.

Advantages

• Lower payments early on, when you may also be paying for moving, furniture or repairs
• Uses seller concessions in a way that directly affects your payment
• If rates fall, you may be able to refinance. Some buydown funds left in the account may be applied when the loan is paid off, depending on the program

Disadvantages and cautions

• You must qualify at the full note rate in most cases. The buydown doesn't help you qualify for a larger loan.
• Payment increases are coming. Make sure you can comfortably afford the full payment from year three.
• Refinancing isn't guaranteed. It depends on future rates, your home's value and your finances.
• Compare against alternatives. The same seller credit could instead pay for permanent points or closing costs.

Buydown vs. permanent points

Say a seller offers $14,000 in concessions. Options might include:

• A 2-1 temporary buydown, lowering payments for two years
• Permanent points, lowering the rate for the life of the loan
• A credit toward closing costs, reducing your cash to close

Which is best depends on how long you'll keep the loan and how much cash you have. If you plan to stay a long time, permanent points may provide more total savings. If you want lower payments in the first couple of years, or expect to refinance, a temporary buydown may fit better. See mortgage points explained.

Questions?

If a seller or builder is offering concessions, it's worth comparing the options before deciding how to use them. contact me and I'll lay them out side by side, or start your pre-approval.