What is a Temporary Buydown?
A temporary buydown is when a party in a mortgage transaction pays a lump sum in order to reduce the interest rate temporarily for early years of the loan. This can help a buyer ease into the full mortgage payment at the beginning of the loan term.
How Does a 2-1 Temporary Buydown Work?
In a 2-1 temporary buydown, the rate is bought down for the first two years of the mortgage loan. For instance, if the note rate is 5%, then the rate is reduced to 3% for the first year, then 4% for the second year, and then remains at the note rate for the remaining life of the loan.
The monthly payments reflect the current interest rate, so the payments are lower during the first two years than they are for the remaining years. The money put toward the buydown is put into an escrow account and is paid to the lender to make up the difference.
How Is That Different from Paying Points to Buy Down the Mortgage Rate?
When a homebuyer pays for discount points, they are buying the rate down for the life of the loan. Typically, the rate is lowered by a small amount—say 0.125% to 0.5%. While this does affect the payment slightly, a temporary buydown lowers the rate—and therefore the payments—much more significantly during the initial buydown period.
Why Would I Offer a Temporary Buydown as a Seller?
As a seller, you can offer this option as a concession, giving more buyers an incentive to purchase your property without having to lower the list price of your home. This can possibly get buyers off the fence who wouldn’t have previously considered buying now.
Which Party Pays for a 2-1 Buydown?
At American Pacific Mortgage, only the seller, builder, or lender may pay for the buydown. This involves a fee at the start of the loan.
Why Would I Want to Consider a Temporary Buydown as a Buyer?
Lower payments in the beginning years can help free up cash for home improvements, furniture purchases, or landscaping. A temporary buydown can also help a buyer ease into the mortgage payment over time, especially if their income is expected to rise in the next few years.
Now that you understand how a temporary interest rate buydown works, consider whether it makes sense for your unique situation. We are always happy to review all sides of the residential mortgage equation for you and compare different loan programs to help find the best one for you. Contact us today for more details.