Temporary Rate Buydown
Some borrowers opt for a temporary buydown, offered by the seller. This approach involves the seller depositing funds into an escrow account upfront, effectively lowering the mortgage's interest rate for the initial one to three years.
So you might be curious: Why not just negotiate a lower price instead of a buydown? Typically, buyers favor buydowns because it equates to a lower monthly payment, giving them more cash flow in the first few years of their mortgage, which can help offset costs like moving or needed repairs.
Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC in 2023 that he doesn't think mortgage rates will reach the 3% range again in his lifetime.
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.
The rate reduction can either be temporary or permanent, depending on the buydown type (which we'll discuss below). Mortgage buydowns can be particularly beneficial when interest rates are on the rise, as they help homebuyers reduce their monthly payments by locking in a lower 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.
In fact, in March, Fed Chair Jerome Powell remarked that interest rates "will not go back down to the very low levels that we saw" during the financial crisis, suggesting that the economy can adapt to a more "neutral" benchmark rate range of between 2.4% to 3.8% in the long run, i.e., less tightening, but not too much ...
The National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the end of 2024 and fall below 6% by the end of 2025, according to the group's latest outlook.
The bottom line. Predicting exactly when mortgage rates will hit 5% is difficult. It could happen by late 2025, but market conditions could speed up or delay this timeline. "Some consumers feel rates will drop in the next two to four months [but] that may never happen," says Rathbun.
Truth: If interest rates are down in a few years and you want to refinance, you can do that whether you purchased a buydown or not. Plus, like we talked about earlier, those smaller payments you make over the first few years of a buydown aren't a free gift.
Buydowns can be advantageous for both borrowers and lenders. For borrowers, it allows them to have more manageable payments in the initial years of the loan, making homeownership or other financial endeavors more accessible. For lenders, buydowns can be an incentive to attract borrowers and increase loan origination.
Your lender will calculate the cost of any points you purchased and add them to your other closing costs. Generally, buying four mortgage points will lower your interest rate by 1 percent. That's also the maximum number of points most lenders will let you purchase.
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.
A buydown could save you a lot in the long term, but it'll take time to make back that initial investment: If you took out a $300,000 mortgage with a 7% interest rate and bought four points, your interest would drop to 6% but it would cost you $12,000.
And here is even better news: The money for the temporary buydown goes into an escrow account and is applied to your loan every month during the buydown period. If you refinance or sell during that period, the unused portion gets applied to your home loan, reducing the balance of your loan.
Current Forecasts and Expert Opinions
The short answer is: It's highly unlikely we'll see mortgage rates drop back to 3% anytime soon. However, recent inflation numbers point to cooling of the pace of inflation.
Despite an overall reduction in borrowing costs over the past two years, the 30-year mortgage rate recently moved up from a little above 6% in September 2024 to closer to 7% in January 2025. That contrasts with longer term mortgage rates holding at historically low levels of between 2% and 3% for much of 2020 and 2021.
Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you. The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict — even for the experts.
After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 23-year high in 2023 before descending somewhat in 2024. Many experts and industry authorities believe they will follow a downward trajectory into 2025. Whatever happens, interest rates are still below historical averages.
Fannie Mae's chief economist says, “Long-run interest rates have moved upward over the past couple of months following a string of continued strong economic data and disappointing inflation readings.” They are putting the average 30-year fixed rate at 6.5% in the beginning of 2025, declining to 6.1% in 2026.
For instance, he predicted the national average for savings accounts will be 0.35% at the end of 2025, but top-yielding offers could stand at 3.8% by year-end. Top-yielding 1-year CDs could pay about 3.7%, while five-year CDs may pay 3.95% by the end of 2025, McBride forecast.
If rates have dropped since you took out your 2-1 buydown mortgage, refinancing could allow you to lock in a lower rate. Even a small decrease in the interest rate can significantly reduce your monthly payments and save you money over the life of your loan.
Google search results for the term "assumable mortgage" spiked in May, following a steady upward trend starting in 2022. Mortgage assumptions allow buyers to take over an existing mortgage at its current rate, possibly securing mortgage rates as low as 2% or 3% depending on when the original mortgage was taken out.
So, how much does it actually cost to buy down your interest rate? Well, it depends! Typically, you can expect to pay between 0.25% to 1% of your total loan amount for every 0.25% you want to shave off your interest rate.