Using Temporary Buydowns to Offset Higher Interest Rates for Mortgages

As mortgage rates have continued to rise over the last couple of years, many people are turning to temporary buydowns to make homeownership more accessible and affordable in the early years. A temporary buydown is when upfront funds are deposited into an escrow account to temporarily reduce the interest rate and monthly mortgage payment for a specific time period. This lower rate reduces your monthly payment and reduces the interest you’ll pay over time.

Temporary rate buydowns are also available in three common forms:

• 1-0 Buydown: Your mortgage rate would be 1% lower the first year. Year two through 30, the interest rate will be the original note rate.
• 2-1 Buydown: Your mortgage rate would be 2% lower the first year and 1% lower the second year. Year three through 30, the interest rate will be the original Note rate.
• 3-2-1 Buydown: Your mortgage rate would be 3% lower the first year, 2% lower the second year and 1% lower the third year. Year four through 30, the interest rate will be the original note rate.

A temporary buydown can be advantageous for borrowers who expect their income to increase in the future or plan to sell the property before the higher interest rate kicks in. It can also make homeownership more affordable in the initial years of the loan when finances may be tighter.

However, it’s essential for borrowers to carefully consider the costs and benefits of a rate buydown. They should calculate whether the savings from the lower interest rate outweigh the upfront fees paid. It’s also important to understand how the interest rate and payments will adjust after the buydown period ends.

Who can pay for a temporary buydown? It is often paid for by the seller. Why would the seller want to offer these concessions? The answer is to achieve the full asking price! With interest rates steadily rising, price reductions on homes are becoming more common and a buydown is one way for sellers to avoid this pitfall. In the long run, it’s often cheaper for sellers to pay for buydowns opposed to reducing the selling price. QCBN

By Greg Riordan

Greg Riordan is a Loan Officer with Legacy Mutual Mortgage. For additional information or to get in touch with Greg, visit legacymutual.com/officers/greg-riordan or call 928-427-5156. You may find his office at 325 W Gurley St #102, Prescott, AZ 86301. Greg cares about the people that choose to trust him with the biggest asset in their lives – their home. He will give straight, honest answers with exceptional advice, whether you are refinancing your home to pay off debt, lowering your rate, reducing the length of your loan or to purchase your first or next dream home.