Product Page - Temporary Mortgage Interest Rate Buydown

A temporary mortgage interest rate buydown is a home financing strategy that home buyers can use to temporarily lower their interest rate to make their monthly mortgage payments more affordable.

What is a Temporary Rate Buydown?

A temporary mortgage interest rate buydown is a home financing strategy that home buyers can use to temporarily lower their interest rate to make their monthly mortgage payments more affordable.

How Does a Temporary Rate Buydown Work?

In most cases, temporary buydowns are paid for by the seller or a home builder as a closing cost in exchange for receiving the full price on their home. The buyer's interest rate is lower for the first couple of years due to a lump sum of money deposited into a buydown account. The buydown funds are then used to reduce the borrower's monthly payments. As a result, the borrower's rate and payments increase annually until the full note rate is reached at the end of the buydown period.

What Types of Temporary Mortgage Rate Buydowns Exist?

A temporary rate buydown, in its simplest terms, expresses the way the interest rate is adjusted early on in the mortgage process. If you decide to do a temporary buydown, which will temporarily reduce the borrower's interest rate, it can be done in a few ways: 1-0, 2-1, or 3-2-1.

  • 1-0 Buydown:

    Buyer's have their "note rate" (the standard rate) reduced by 1% for the first year, and then it returns to the note rate after this first year.

  • 2-1 Buydown:

    Buyers can ease into their monthly mortgage payments while having the reliability of knowing when their payments change, and sellers can use this in place of a price reduction, while getting more eyes on their listings. Temporary interest rate buydowns are allowed on fixed-rate mortgages, primary residence provided the rate reduction does not exceed 2%, and the rate increase will not exceed 1% per year.

  • 3-2-1 Buydown:

    The interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. After the buydown period ends, the lender will charge the full interest rate for the remainder of the mortgage.

How Does a Temporary Rate Buydown Benefit the Buyer?

A temporary rate buydown was a popular tactic in the late 1970s and early 1980s to reduce a buyer's monthly mortgage payment. This tactic is now becoming popular again due to its many benefits to a homebuyer. Such as:

  • Reduced Payment

    A reduced monthly mortgage payment for the first 1-3 years of their mortgage term.

  • Reallocation of Costs

    Savings as a result of the rate buydown could be reallocated to cover closing costs, down payment, home upgrades, or other expenses.

  • The Gift of Time

    Temporary buydowns give buyers the option to enjoy a lower monthly mortgage payment while waiting for the opportunity to refinance to a lower rate.

Why Would a Seller Want to Buydown a Borrower's Rate?

It may be hard to envision why a seller would want to buydown a borrowers rate. This is understandable given the nature of the program, but a temporary buydown does have benefits for the seller. In fact, sellers may use a buydown as an incentive for a future buyer to purchase their home due to how it will ultimately benefit them.

Sellers may buydown a borrower's rate because:

  • It is a more cost effective for buyers than reducing the sale price of the home.
  • Sellers can advertise the option of covering the rate buydown to attract more buyers.

Example

On a $250,000 loan with a rate of 6.5%, the monthly payment would be $1,580. After a temporary 2-1 buydown of $5,690, here's what the reduction in monthly payments would look like:

Year
1
2
3
Rate
4.5%
5.5%
6.5%*
Monthly Payments
$1,267
$1,420
$1,580
*Final Note Rate

What Does AnnieMac Home Mortgage Offer?

Currently, AnnieMac Home Mortgage offers 2-1 and 1-0 seller-paid temporary buydowns. More programs are expected this month to help provide our clients with the best possible program for them and their unique financial situations.

Interest Rate Buydown Eligibility Requirements:

  • Temporary interest rate buydowns are allowed on fixed-rate mortgages, primary residence provided the rate reduction does not exceed 2%, and the rate increase will not exceed 1% per year.
  • Minimum FICO score of 660
  • Purchase Owner Occupied Only
  • Seller must be a contributor

Is a Temporary Mortgage Interest Rate Buydown Right for Me?

While a temporary rate buydown is an excellent option for many homebuyers today, everyone's scenario is different. That is why we recommend you speak with one of our Licensed Mortgage Originators to make a personalized mortgage plan based around your needs.