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Interest Rate Buydowns

If you’re in the market for a new home and navigating the world of mortgages, you may have come across the term “interest rate buydown.”  Today, we will explain buydowns in simple terms. The main focus today is a specific type of buydown: the 2-1 temporary interest rate buydown.

There are two common ways to get a lower interest rate using a buydown. The primary difference between buydown types lies in the duration of the reduced interest rate.

1. Temporary Interest Rate Buydown:

A temporary interest rate buydown, like the 2-1 buydown, is designed to provide you with lower initial monthly mortgage payments for a predetermined period—typically the first few years of your loan. The “2-1” specifically means that the interest rate is bought down by 2% in the first year and by 1% in the second year. After that, your interest rate and monthly payments will adjust to their original, higher level.  You can also do a 3-2-1 buydown or a 1-year temporary buydown.

Temporary buydowns can not be paid by the home buyer. Most commonly it is paid for using seller concessions, but a real estate agent can also contribute a portion of their commissions to help pay for it as well.  In the case of the 2-1 buydown, the cost of the buydown is the total of the savings from the reduced interest rate over the two years.

This type of buydown can be a great option if you anticipate your income to increase in the future, if the market conditions point to an expected opportunity to refinance soon, or if you want to make your initial homeownership years more affordable. Keep in mind that while your monthly payments are lower at the beginning, they will gradually increase once the temporary buydown period ends.

2. Permanent Interest Rate Buydown:

On the other hand, a permanent interest rate buydown involves paying extra upfront costs to secure a lower interest rate for the entire duration of your mortgage. This means that your monthly payments will stay lower throughout the life of your loan. Permanent buydowns are typically best suited for individuals who have the financial means to pay more upfront and prefer stable, predictable mortgage payments.

Permanent buydowns are comparatively very expensive and are generally not recommended in higher interest-rate markets.  Unlike a temporary buydown, these can be paid for by the buyer, seller, gift funds, agent commissions, or lender credits.

Choosing the Right Buydown for You

So, which type of interest rate buydown is right for you? It ultimately depends on your financial situation, your long-term goals, and your ability to make upfront payments.

If you’re a homebuyer looking for a temporary financial boost during the initial years of homeownership, a 2-1 temporary interest rate buydown may be the right choice. It allows you to enjoy lower monthly payments at the start and adjust to higher payments as your financial situation stabilizes.

Understanding interest rate buydowns can help you make an informed decision when purchasing a home. Whether you opt for a temporary or permanent buydown, the goal is to find a mortgage solution that aligns with your financial goals. Our goal is to provide you with a comfortable and affordable homeownership experience.