Your mortgage rate and your sales price determine your monthly payment.
When you start comparing mortgages, one of the most critical factors you must consider is your interest rate.
One percentage point in your interest rate is equal to several thousands of dollars throughout the life of your loan.
With rising interest rates, one way to adjust your mortgage rate is utilizing a mortgage rate buydown, also known as a buydown mortgage.
Explaining a Buydown
In simple terms, by making a one-time lump sum payment allows the homebuyer a lower interest for a period of time.
A mortgage buydown can make sound financial sense in many situations. However, there are also instances where a mortgage buydown can actually cost you more.
Buying Points
A buydown mortgage allows the home buyer to buy points, also called mortgage points, for a lower interest rate.
When you apply for a mortgage, your lender will tell you the expected interest rate. Rates are determined by a myriad of factors such as your credit, debt-to-income ratio, and the current state of the market.
If you are willing to make a large initial payment, you may qualify to buy a lower interest rate.
A mortgage is calculated by the magnitude of your loan, with points representing 1% of your mortgage.
For example, if you have a $400,000 mortgage, one point would equal $4,000 - two points would equal $8,000, and so on.
Buying points ahead of time, allows you to get a lower rate - which can lower the amount you pay over the life of your loan. Oftentimes, this will save you money.
Not all lenders offer buydown options. It depends on your financial situation and the lender you are working with.
Types of Mortgage Rate Buydowns
Temporary Buydowns:
A temporary buydown allows the home buyers to lower their rate initially, with an inevitable return to the rate that was offered. You won’t save as much over time, but it does offer initial lower rates. This can be great if you know in the next few years your financial situation will allow for higher monthly payments.
A 3-2-1 Buydown is a temporary buydown. The homeowner will have the lowest monthly payment in the first year of the loan, and the following two years payments will increase to their permanent monthly payment. Once you reach year four, you will arrive at your permanent monthly payment.
Permanent Buydowns:
In a permanent rate buydown, the homeowner will pay for points at closing - this lowers their mortgage rate for the life of the loan.
The more points you buy, the lower your rate becomes.
In a permanent buydown you must apply for a fixed-rate mortgage in order for your monthly payment to remain the same.
How Much Do Mortgage Buydowns Cost?
The precise cost of a mortgage buydown depends on many variables such as the loan amount, how much you are buying down, and the associated fees.
Every lender has their own policies but generally homebuyers need to prepare to make a minimum 20% down payment and have good credit.
The Bottom Line
Buying down an interest rate whether permanently or temporarily may help with rising interest rates. It is important to speak to your lender to see what offers are available to you.
