Watch our Video on Mortgage Buydowns here: https://youtu.be/7afbNLNfhrY
What Is a Buydown?
A buydown is a mortgage financing technique in which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage or possibly its entire life.
A 2-1 buydown, for example, is a specific type of mortgage buydown that allows homebuyers to save on their interest rate for the first two years of the loan. Buydowns can also use a 3-2-1 structure as well. Borrowers with temporary buydowns funded by a seller or builder pay a lower mortgage rate during the initial period of their loans, and the borrower’s reduced monthly payments are subsidized with money deposited into an escrow account. The escrow account is funded by either the seller or builder via a lump sum payment at closing.
Buydowns are easy to understand if you think of them as a mortgage subsidy offered by the seller on behalf of the homebuyer. Typically, the seller contributes funds to an escrow account that subsidizes the loan during the first years, resulting in a lower monthly payment on the mortgage. This lower payment allows the homebuyer to qualify more easily for the mortgage. Builders or sellers may offer a buydown option to help increase the chances of selling the property, by making it more affordable.
The builder or seller of the property usually provides payments to the mortgage-lending institution, which, in turn, lowers the buyer’s monthly interest rate and, therefore, monthly payment. The home seller, however, usually will increase the purchase price of the home to compensate for the costs of the buydown agreement.
Buydown terms can be structured in various ways for mortgage loans. Most buydowns last for a few years, then the mortgage payments increase to a standard rate once the buydown expires. A 3-2-1 and 2-1 mortgage buydown are two common structures lenders can use.
Example of a Buydown Mortgage
Here are some examples of how a buydown mortgage can work. Say you’re borrowing $250,000 with a 30-year fixed-rate loan at 6.75%. You can choose between a 2-1 buydown or a 3-2-1 buydown.
Here’s what the loan breakdown would look like with a 2-1 buydown option:
Year 1: $1,304 at 4.75% interest
Year 2: $1,459 at 5.75% interest
Year 3: $1,622 at full 6.75% interest
The buydown fee for this loan would be $5,759.
Now, say you choose the 3-2-1 buydown instead. Here’s what your loan payments would look like:
Year 1: $1,158 at 3.75% interest
Year 2: $1,304 at 4.75% interest
Year 3: $1,459 at 5.75% interest
Year 4: $1,622 at full 6.75% interest
Meanwhile, the buydown fee for this loan increases to $11, 324. So, when considering a buydown, it’s important to look beyond the initial low payment period to determine whether the costs involved in the near term are worth any interest savings you might realize.
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.
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For more information about Choice Mortgage Group, visit www.choicemortgage.com.
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