Interest Rate Buydowns

Blog Post Image
Real Estate

Interest Rate Buydowns

What is an interest-rate buydown? A buy down is very common in today's market with the interest rates being higher than they were in the previous months and a great tool to help you qualify for a larger loan and purchase a higher-priced home than you could under different circumstances. A buydown allows you to pay extra points up front in return for a lower interest rate for the first few years. The good news: the extra points are tax deductible!

Buydowns are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buydown plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that "buy down," or lower, the effective interest rate paid by the home buyer. Many seller's in today's market are offering buy downs of 2% or more for example to help buyers with their payment comfort in purchasing their home.  

While the most common way of obtaining a buydown is by paying extra points up front, many mortgage companies now increase the note rate to cover the cost in later years.

How does it work? Are there different types of buydowns? The most common is the 2-1 buydown, which oftentimes costs 3 additional points above current market points. It works like this: During the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.

Another option is the 3-2-1 buydown. This reduces the mortgage rate 3 percent the first year, 2 percent the second and 1 percent the third. Thereafter you pay the full rate.  A lot of agents and lenders these days are saying "marry the house, date the rate" meaning refinance when rates drop again.

If you have any questions as a buyer seeking a rate buy down on a home you want to purchase or as a seller needing help in qualifying a buyer to their payment comfort contact me today!  I serve California and Florida, there are some great investment opportunities in other states, I work directly in all 50 states with referral partners so if you have been thinking of leaving the state or investing in another ask me how! Beach condominiums can bring in rental income from vacationers and only cost between the 300-400k range in sunny Florida or North Carolina!  I've helped hundreds of people relocate and invest in other states, let me be your guide!