If you've been shopping in the real estate market this year, you've probably heard about buydown options to help reduce your mortgage interest rate. And if not, let me explain.
In short, buyers can ask the sellers for a concession, generally a dollar amount that can be used towards reducing the interest rate on their mortgage. For the seller, this is the equivalent of a price reduction, but for a buyer, it opens up several options.
Temporary Buydown
This has the most impact on the monthly payment, but for a fixed length of time. This buydown can be for 1-3 years, and most commonly we say the 2-year version (a 2-1 buydown). The seller contributes a lump sum at closing that is then held in escrow by the lender and used to offset the monthly payment amount. For example, if the buyer is getting an interest rate of 7.5%, the 2-1 buy down means that in their first year, their payment reflects a 5.5% interest rate and in their second year, a 6.5% rate. If they have not refinanced before the end of the second year, the rate goes back to a (fixed) 7.5%.
Permanent Buydown
This tends to have a little less bang for the buck on the front end, but buyers can use the seller concession amount to do a permanent buydown of the interest rate for the life of the loan. The same amount of money used for a 2-1 buydown will likely only reduce the interest rate by half a percentage point or so, but it would be locked in for 30 years and could save the buyer far more over the life of the loan.
EXAMPLE: Peep this example from USNews that highlights the financial differences between a permanent buydown (seller-paid points) and a temporary buydown (2-1 Rate buydown) vs a price reduction.
Which one is right for you?
Most of our buyers are opting for the temporary buy down to free up money in the first couple of years for startup costs like home improvements and buying furniture or appliances. They are also hedging a bet on interest rates coming back down so they can refinance in the next 2 years before they ever even see the full interest payment. Some others have done the permanent buy down, feeling like it may be a few years before we see a significant drop in rates and preferring to lock in better pricing from the get-go.
Want to dive deeper into this? Give us a call and we can point you towards some great lenders who will break it down for you and your specific budget.