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 |
| Term | 30 years |
| Rate | 6.375% |
| APR | 6.656% |
| Monthly Payment | $998.19 |
Payment Breakdown:
| Effective Rate | Total Monthly Payment | Contributor Portion of Monthly Payment | Your Monthly Payment | |
| Year 1 | 4.375% | $998.19 | $199.33 | $798.86 |
| Year 2 | 5.375% | $998.19 | $102.24 | $895.95 |
| Year 3 | 6.375% | $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.
