Getting concessions from a seller who wants to sell quickly? You might be in the ideal position to use these toward a Temporary Rate Buydown to save on your interest rate at the beginning of your loan, for a more-comfortable mortgage payment.
A mortgage buydown loan is a type of mortgage financing where the borrower or a third party pays additional upfront fees, known as "points," to reduce the interest rate on the mortgage for a specific period. The goal of a mortgage buydown is to make the initial payments more affordable and manageable for the borrower, especially if they expect their income to increase in the future.
Here's how a mortgage buydown typically works:
- Points: The borrower or a third party pays points to the lender at the time of closing. Each point is equal to 1% of the total mortgage amount. The number of points paid determines the extent of the interest rate reduction.
- Temporary Interest Rate Reduction: The lender lowers the interest rate on the mortgage for an agreed-upon period, often the first few years of the loan. This reduction is often expressed in terms of fractions, such as a 2-1 buydown or a 3-2-1 buydown, indicating how many percentage points are reduced in each year of the initial period.
- Gradual Rate Increases: After the initial period, the interest rate gradually increases to the original rate specified in the mortgage contract. For example, with a 3-2-1 buydown, the interest rate might be 3% lower in the first year, 2% lower in the second year, and 1% lower in the third year before reverting to the original rate in subsequent years.
- Monthly Payments: As a result of the reduced interest rate during the buydown period, the borrower's monthly mortgage payments are lower than they would have been without the buydown.
Mortgage buydowns are usually used in specific circumstances:
- To Assist Homebuyers: Buydowns can be used to make homeownership more accessible to individuals who can afford the long-term payments but might struggle with higher initial payments.
- To Facilitate Sales: Sellers or builders may offer buydowns as an incentive to attract buyers, especially in a slow real estate market.