What is a Temporary Buydown?
A temporary buydown is a loan where the interest rate is bought down temporarily for the first few years of the loan. This can help a buyer ease into the full mortgage payment at the beginning of the loan term.
How does a 2-1 temporary buydown work?
The rate is bought down for the first two years. For instance, if the note rate is 5%, the rate is reduced to 3% for the first year, then 4% for the second year, then remains at the note rate for the remaining life of the loan. The monthly payments reflect the rate at the time, so the payments are lower during the first two years than they are for the remaining years. The money put towards the buydown is put into an escrow account and is paid to the lender to make up the difference.
How is that different than paying points to buy down the rate?
When you pay discount points, you are buying the rate down for the life of the loan. Typically the rate is lowered by a small amount - say .125% to .5%. While this does affect the payment slightly, a temporary buydown lowers the rate (and thus the payments) much more significantly during the initial buydown period.
Why would I offer a temporary buydown as a seller?
As a seller, you can offer this option as a concession for the sale of your property, thus giving more buyers an incentive to purchase your property – without lowering your list price. This can possibly get buyers off the fence who wouldn’t have previously considered buying now.
Who pays for a 2-1 buydown?
At Diversified Capital Funding/American Pacific Mortgage, only the seller or builder may pay for the buydown.
Why would I want to consider a temporary buydown as a buyer?
Lower payments in the beginning years can help free up cash flow for home improvements, furniture purchases, or landscaping.
Now that you understand how a temporary interest rate buydown works, consider whether it makes sense for your unique situation. We are always happy to review all sides of the equation for you and compare different loan programs to help find the best one for you.