Buying a home is a big purchase at any price and today’s rising interest rates are not making it any easier to afford your dream home. While some buyers may decide to wait on the sidelines due to interest rates, others may be looking for smart ways to save money at the beginning of their loan term by lowering the interest rate. A temporary interest rate buydown could be exactly what these buyers are looking for.*
What Is A Temporary Interest Rate Buydown?
A temporary interest rate buydown involves having a lower interest rate for a period of time at the beginning of your fixed rate mortgage. The 2 most common types of temporary interest rate buydowns are a 2/1 and a 1/0 buydown.
A 2/1 buydown means your interest rate in year 1 is 2% lower than your permanent rate and your interest rate in year 2 is 1% lower than your permanent rate. For example, although your permanent interest rate might be 6%, your interest rate for the first year would be 4% and your interest rate for the second year would be 5%.
A 1/0 buydown means your interest rate in year 1 is 1% lower than your permanent rate. For example, although your permanent interest rate might be 6%, your interest rate for the first year would be 5%.
At the end of this article, we’ll walk you through an example showing your total savings on a 2/1 buydown, but a temporary mortgage buydown benefits you as follows:
- Your monthly payment will be lower for the period of time you have the buydown; allowing you to spend money on renovations, updated furniture or even just save it for a rainy day.
- You can buy a home today without worry about whether interest go up or come down because you have access to low rates today and your interest rate will never be higher than the permanent interest rate quoted at closing. As the market shifts from a seller’s market to a buyer’s market, buyers may not want to wait for rates to come down before getting a deal on their dream home. Access to temporarily lower rates today provides flexibility.
How Does a Temporary Interest Rate Buydown Work?
When you take advantage of a temporary interest rate buydown, your interest rate is lower than the final rate in your contract. So, how do mortgage investors get paid on the difference during your temporary interest period.
That difference between the interest you would pay using your permanent interest rate and what you’re paying the lender during the first year or two of your mortgage is paid from an escrow account held with the lender that either your seller or a real estate agent covered.
Every month during the temporary buydown period an amount sufficient to make up for the difference will be automatically taken out of the escrow account and paid to the lender.
What Loan Programs Utilize Temporary Buydowns?
Temporary buydowns are available on all 30-year fixed rate Conventional, FHA, VA and USDA mortgages. Have a question on whether your loan qualifies? Contact us today (link to firstname.lastname@example.org).
Check Out The Savings!
Let’s take a quick look at an example to illustrate how big the savings could be:
Suppose you utilize a 2-1 buydown on a $500,000 30-year fixed loan with a permanent interest rate of 6.0%. During the first year of your loan, your monthly payment is $2,387 at a 4.0% interest rate (a savings of $611 per month). During the second year of your loan, your monthly payment is $2,684 at a 5.0% interest rate (a savings of $314 per month). Finally, the interest rate becomes fixed at 6.0% with a monthly payment of $2,998 in the third year.
Total savings over the first 2 years is $11,100!
One Caution When Utilizing Temporary Buydowns
Make sure you are comfortable with your monthly payments at the permanent interest rate. While we all hope for lower rates in the near future, no one can predict the future. Should rates increase above today’s interest rates, you’ll be very happy knowing that you locked in a permanent interest rate at today’s rates, but you should still feel comfortable with the total monthly payment at the closing of your loan.
FAQs for Temporary Interest Buydowns
What interest rate is used to determine whether I qualify for my loan amount?
- Lenders qualify a borrower for this program using the permanent interest rate. If your permanent interest rate is 6% but your temporary interest rate will be 5%, LendFriend, and all lenders, will use a 6% rate to determine the loan amount you qualify for.
Why would my seller or real estate agent pay for the escrow?
- It is important to note that the market is shifting from a seller’s market to a buyer’s market. More inventory is coming to market and that inventory is taking a longer time to sell. That shift allows you as the buyer the ability to be more demanding in how much you are willing to pay and how your deal is structured. Talk to your real estate agent about your options to request seller or agent concession when home buying
What happens if rates go down in 2 years? Can I refinance?
- Of course you can refinance! The temporary interest buydown is the perfect solution to today’s high interest rates. If interest rates come down over the next 1-2 years, as they are projected to do so, you’ll be able to refinance with LendFriend without any prepayment penalties. Temporary interest rate buydowns allow you to buy your home today, while home prices are depressed, before interest rates come back down and more buyers enter the market. You’ll then be able to refinance the loan on your home instead of worrying about bidding wars and low inventory!
To Sum It Up
A temporary mortgage buydown is a great solution for those buyers looking to enter the market and purchase a home but are cautious about today’s interest rates. Temporary buydowns provide you with lower monthly payments and allow you to have more flexibility with your money at the beginning of your loan term.
*Offer valid on fixed-rate conventional conforming and government loans in retail channels. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans and may not be used with any other discounts or promotions. This offer is subject to changes or cancellation at any time at the sole discretion of LendFriend Home Loans (a DBA of American Financial Network, Inc.). Additional restrictions/conditions may apply. This is not a commitment to lend and is contingent on qualification per full underwriting guidelines.