Make sure you understand the tradeoffs of a buydown before committing.
Rising mortgage rates have pushed potential home buyers to the sidelines and slowed home sales. In an effort to simulate the sluggish market, both sellers and mortgage lenders have begun to woo would-be homeowners with rate buydowns and discount points that make home loans more affordable for buyers.
“Those kinds of products have been around and typically only get utilized when lenders are desperate to create a need for a consumer,” says Gordon Miller, president of North Carolina-based Miller Lending Group.
So before you use a rate buydown or discount points to lower the interest rate on your mortgage, it’s important to understand how they work and when it makes sense for you.
How does a mortgage rate buydown work?
Buydowns and discount points (otherwise known as mortgage points) are both ways to lower your mortgage’s interest rate by paying extra money when you take out the mortgage. The terms are sometimes used interchangeably, so it’s important to understand how your individual mortgage lender is defining the buydown. “Make sure you get a copy of the
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What are discount points?
When you pay for discount or mortgage points, you permanently lower your mortgage’s interest rate (as opposed to buydowns which only temporarily lower the rate).
You’ll generally pay 1% of the total loan amount for each point and receive a 0.25% rate reduction, but the cost and discount vary depending on the market and lender. “What you get with one point from one lender could be worlds different than with another lender,” says Jennifer Beeston, mortgage educator and senior vice president at Guaranteed Rate.
What are temporary buydowns?
A temporary buydown lowers the interest rate to a certain percentage, which then increases each year until it returns to the original rate. Common temporary buydown terms are 2-1 and 1-0, where the first number is the rate reduction you receive in the first year and the second number is the rate reduction for year two.
With a 2-1 buydown, a 6.25% mortgage rate would be cut to 4.25% the first year, increase to 5.25% in year two and return to 6.25% in the third year. Here’s what that looks like for a $350,000 loan balance.
Mortgage rate buydown example
| Interest rate | Monthly payment | Monthly savings | Yearly savings | |
|---|---|---|---|---|
| Year 1 | 4.25% | $1,722 | $433 | $5,196 |
| Year 2 | 5.25% | $1,933 | $222 | $2,664 |
| Year 3 | 6.25% | $2,155 | $0 | $0 |
A temporary buydown is typically paid for by either the seller, homebuilder or lender and it effectively offsets a portion of the buyer’s monthly payment. From the example above, it would cost $7,860 for the full 2-1 buydown, which is the total amount the buyer saves. The money used to lower the buyer’s monthly payments is deposited into an account and taken out each month by the mortgage loan lender. Keep in mind, with a temporary buydown the borrower needs to qualify for the home loan based on the full interest rate after the buydown expires.
Regardless, of whether or not a rate buydown makes sense for your situation, you want to ensure you’re getting the best deal from the start. And if you’re not comparing offers from multiple mortgage lenders, there’s a good chance you’re leaving money on the table. Select ranked the lenders below as some of the best mortgage lenders on the market: