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Flat Branch Home LoansTemporary Interest Rate Buydown

What is a Temporary Interest Rate Buydown?

A temporary rate buydown is a financing strategy that reduces a borrower’s mortgage payments for a set period of time. This is made possible because of an upfront payment made at closing to temporarily “buy-down” the interest rate.

How Does a Temporary Interest Rate Buydown Work?

When a borrower opts for a buydown, a portion of the monthly interest is temporarily “bought down,” by an upfront payment. This allows the borrower to make reduced monthly mortgage payments for a specified period, often the first one or two years of the mortgage. This period is known as the “buydown period.” At the end of the buydown period, the borrower is required to pay the full amount of the monthly mortgage payment for the remainder of the mortgage term.

Who Pays for the Temporary Interest Rate Buydown?

The person making the upfront payment at closing is called the “contributor.” Typically, the buyer will negotiate for the seller, builder, real estate agent, or lender to contribute the buy-down funds.

Here's an example of what the payments on a 2/1 buydown would look like: *

 Loan Terms
Property Value$200,000
Loan Amount$160,000
Term30 years
Rate6.375%
APR6.656%
Monthly Payment $998.19

Payment Breakdown:

 Effective RateTotal Monthly PaymentContributor Portion of Monthly PaymentYour Monthly Payment
Year 14.375%$998.19$199.33$798.86
Year 2 5.375%$998.19$102.24$895.95
Year 36.375%$998.19$0.00$998.19

As can be seen from the example above, although the total monthly payment amount does not change, the amount the borrower is required to pay is reduced by the amount of the contributor’s payment spread out over the first two years. In this case, the cost of the buy-down would be $3,618.84, which is the difference between the regular mortgage payment and what the borrower is required to pay in the first two years. 

Who Can Benefit From a Temporary Interest Rate Buydown?

Buyers: Choosing a temporary buydown can help borrowers free up cash flow at the start of a mortgage. This can be useful for new homeowners who may have additional expenses for things like furniture, repairs, or landscaping.

Sellers: Sellers may offer to pay for a temporary buydown to make their home more appealing to buyers.

Builders: Like sellers, builders might offer temporary buydowns to attract buyers to new developments, especially in the early stages of selling properties in a new community.

The Difference Between a Temporary Interest Rate Buydown & Discount Points

Temporary rate buydowns are different from paying discount points. With discount points, an upfront payment reduces the interest rate for the entire life of the loan. On the other hand, a temporary buydown only lowers the payment for a set period, after which the payment amount goes back to the original amount. Borrowers need to consult with a loan advisor to determine which option is best for them based on their individual circumstances, including expected cash flow needs and expenses in the initial years of the mortgage. 

Structuring a Temporary Interest Rate Buydown

When you arrange a temporary buydown, the buyer, lender, and any contributors will negotiate and agree on the structure. Additionally, there might be limits on how much they can contribute. It's important to review all the details with a mortgage professional to understand the duration of the reduced interest rate and the total cost. This can help you make the best financial decision.

 

*The example loan is a 30-year fixed Conventional loan with 20% down, and a two-year buydown benefit. The rate of 6.375% (APR 6.656%) is fixed for the entire 30-year term, but the initial payments are reduced based on the buydown benefit.
All figures and rates shown are for educational purposes only and should not be construed as mortgage advice or a commitment to lend. Subject to lender terms, conditions, and approval. Interest rates and APRs may vary based on borrower credit scores and other variables. Hypothetical APR reflects the effective cost of the loan taking into account such items as closing costs, discount points and other origination fees.
Monthly payment amounts are reduced due to being partially prepaid. Monthly payment amounts do not include mortgage insurance, taxes, homeowner’s insurance, or condo/HOA fees. If applicable, your payment may be greater.