Buying a house is a big deal financially, especially when you factor in rising interest rates. But what if there was a way to obtain a lower interest rate thanks to the help of a temporary buy-down? This money-saving technique is not new, but as interest rates have escalated over the last year, the old practice is quickly becoming commonplace yet again.
How does a buy-down work?
Unlike a typical buy-down where the buyer pays mortgage points at the time of closing to permanently lower the interest rate, a temporary buy-down offers a short-term savings on interest rates and is financed by sellers. Here’s how it works: The seller offers a concession – a buy-down subsidy to the buyer, which is used to temporarily buy down the interest rate.
Types of buy-downs
2-1 buy-down
With a 2-1 buy-down, during the first year of your mortgage, the interest rate will be 2% below market, and in the second year it will be 1% lower.
For example, if the going interest rate is 7.25%, the buyer’s mortgage payment would be based on 5.25% interest for the first 12 months of the loan and 6.25% for the second 12 months of the loan. The buyer would then pay 7.25% for the remainder of the loan (or until they refinance).
3-2-1 buy-down
A 3-2-1 buy-down lowers the borrower’s interest rates for three years. The first year the borrower has an interest rate that is 3% below market, 2% below market the second year and 1% below market the third year. The payment then reverts back to the original market interest rate for the remainder of the loan or until they refinance.
How much does a buy-down cost?
Remember, temporary buy-downs are financed by the seller, and will cost the total difference in payment between 5.25% and 7.25% for the first year, and the difference in payment between 6.25% and 7.25% for the second year.
In keeping with the 2-1 buy-down example above, using a home purchase price of $450,000, and a down payment of $45,000, the cost of this particular buy-down would be about $9,540.00
If you think a buy-down is right for you, make sure to contact your local mortgage representative.
