How to Buy Down Your Mortgage Interest Rate – Temporary and Permanent Options

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When mortgage rates are on the rise, lenders may be more inclined to offer a mortgage financing technique — known as a mortgage rate buydown — that allows you to pay extra money to get a lower rate. A buydown can be permanent or temporary, and understanding the differences between the two will help you decide if it’s worth the extra expense.

What is a mortgage buydown?

A mortgage rate buydown, often called a “buydown mortgage”, is a financing arrangement that gives a borrower a lower rate for a certain number of years or for the life of the loan. The borrower pays points at closing to cover the difference between the standard rate and the lowered rate. There’s no specific limit on the number of points that someone can buy down on a mortgage. But the number of points an individual buyer may be allowed to buy down can depend on the type of mortgage and the loan terms.

How does a buydown work?

A mortgage rate buydown can be set up in several ways, and the terms are negotiable from lender to lender. However, the structure will vary depending on whether you want a permanent or temporary mortgage buydown rate.

How a temporary mortgage rate buydown works.

With this option, your rate is lower at first but eventually increases.

• The initial rate is lower for a set time. Borrowers can choose buydown plans with rates up to 3% lower than current mortgage rates. For example, if market rates are 5%, a 2-1 buydown would allow you to make payments on an initial rate of 3% for the first year.
• The rate goes up each year based on the plan you choose. Rates typically rise by 1% per year for the remainder of the buydown plan. In the 2-1 example above, the rate in the second year would rise to 4%.
• The final rate is fixed for the remaining loan term. In the example above, after the third year, the rate would return to the original market rate of 5%, where it would remain until the loan is paid off.
• The cost of the buydown mortgage rate is paid at closing. You’ll see the charge for the buydown on Page 2 of your loan estimate in the “loan costs” section.

How a permanent mortgage rate buydown works.

You’re buying a lower rate for your entire loan term with a permanent buydown mortgage rate.

• The lender offers a lower rate by charging discount points. Typically, the more discounts you pay the more you can reduce your mortgage rate.
• The rate never increases as long as you keep your loan. Unless you take out an adjustable-rate mortgage (ARM), the rate won’t increase for the duration of your loan term.
• The buydown cost is paid at closing. The lender adds the cost of the mortgage rate buydown to your closing costs.

How to pay for a mortgage buydown.

There are three ways to pay for a mortgage rate buydown: You can cover the cost yourself, ask the seller to pay for it or finance it into your loan. Here’s how each option works.

• Pay cash. If you have an extra stash of cash, you can use it to pay for a lower rate.
• Ask the seller to pay. Some sellers may try to incentivize you to buy their home by offering to pay for a rate buydown.
• Use a builder closing cost incentive. Homebuilders may offer financing incentives if you use their “in-house” mortgage company. You can typically use the funds to cover closing costs, including buying down your rate.
• Gift funds. If you’re receiving a gift from family or a close friend, you may be able to apply the gift funds to a mortgage rate buydown.

Choice Mortgage Group

Choice Mortgage Group is dedicated to helping people improve their financial situations and create lasting memories through home ownership – one loan at a time. Our team of mortgage experts build customized solutions for each of our clients, based on their specific situations, goals, and objectives.

Specializing in residential mortgage lending for over 25 years, our programs include conventional and government lending, purchases, and refinances. We also offer portfolio lending for self-employed borrowers and borrowers with complicated tax situations.

Now licensed in 12 states, South Florida is where Choice Mortgage Group started, and we like to call it home. We are devoted Florida Atlantic University Owls fans and are proud to be the official mortgage lender partner of FAU Athletics. We also support numerous other local organizations.

For more information about Choice Mortgage Group, visit www.choicemortgage.com.

Choice Mortgage Group

2424 N Federal Hwy, Suite 100

Boca Raton, FL 33431

(561) 395-6900

info@choicemortgage.com