In an interest rate buydown, the seller pays mortgage points on the buyer's mortgage, lowering the interest rate. Permanent buydowns are more beneficial than price reductions for the buyer and the seller. Also called seller buydowns, they're better for buyers who plan on living in the same house for a long time.
Buying down the rate offers a couple of benefits for borrowers: Save on interest. The first one to three years of your mortgage or through the life of the loan, you can save thousands of dollars in interest—that adds up. Lower monthly payment.
Buydown Costs = Unpaid Interest
The cost of the 2-1 buydown is the sum of the unpaid interest for the first two years. Over the first two years, Joe has “saved” $9,323.18 ($6,167 + $3,156) of interest. This amount is the total amount the seller has a requirement to pay at closing to secure the 2-1 buydown.
In a 2-1 buydown, the interest rate will increase from one year to the next until it settles into its permanent rate in year three. To make up for the interest that they won't be receiving in those early years, lenders will charge an additional fee. Either a homebuyer or a home seller can pay for a buydown.
Rates could come down.
This is perhaps the biggest drawback of 2-1 buydown mortgages when you utilize them when interest rates are high. If rates come down, your locked rate could be much higher than the new current market rate, meaning an ARM would have been a better choice.
A borrower may purchase points, which lower the interest rate by a certain percentage. In other cases, the lender or seller will pay for a temporary buydown to help close the deal.
One common question borrowers have is, “Can you refinance after a 2-1 buydown?” The answer is yes; refinancing is possible and can be a beneficial option for many borrowers.
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.
Qualified borrowers could see a monthly mortgage payment of principal and interest between $3,043.80 and $4,029.80 for a $600,000 mortgage loan right now.
In general, buying mortgage points is most beneficial when you both intend to stay in your home for a long period of time and can afford mortgage point payments. If this is the case for you, it helps to first crunch the numbers to see if mortgage points are truly worth it.
Here are some general guidelines: One point usually costs 1% of your loan amount. So, if you're borrowing $300,000, one point would cost $3,000. Each point typically reduces your interest rate by 0.25%.
Temporary Rate Buydown
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. Consequently, this arrangement can temporarily decrease the monthly mortgage payments for the borrower.
A mortgage buydown allows you to pay extra money upfront to secure a lower interest rate on your home loan. A reduced rate can save you thousands of dollars in lifetime interest and lower your monthly payments.
When you choose this program, your interest rate will be 2% lower in the first year of your mortgage and 1% lower in the second year. As the mortgage term enters its third year, the mortgage rate will increase to the original rate on the loan.
The borrower is required to pay 2 points on a $50,000 loan. A point is a fee equal to 1% of the loan amount. Therefore, 2 points on a $50,000 loan would be 2% of $50,000. Therefore, the borrower has to pay the lender $1,000 in points.
An amount paid to the lender, typically at closing, in order to lower the interest rate. Also known as “mortgage points” or “discount points.” One point equals 1% of the loan amount (for example, 2 points on a $100,000 mortgage would equal $2,000).
A mortgage point is equal to 1 percent of your total loan amount. For example, on a $100,000 loan, one point would be $1,000.
2/1 Buydown Mortgage CON 4: There Are No Guarantees on Interest Rates. Just as there are no guarantees in life, there are no guarantees on where interest rates will go in the future.
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.
For sellers, a 2-1 buydown can attract more offers at higher prices and get their homes sold faster. In turn, this could lead to higher net proceeds for the seller. Buyers can afford more if sellers make concessions to help reduce the loan cost and the monthly mortgage payment for the buyer.
With a permanent rate buydown, the seller pays a portion of the buyer's closing costs that are used toward buying mortgage discount points.
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.