BUYDOWNS

Buydowns can be permanent for the life of the loan or temporary, lasting only the first few years. 

The choice between temporary vs. permanent rate buydown options depends on your budget, what the lender or seller is offering, the market, and other factors.

Temporary buydown can be the popular type of rate buydown known is a 2-1 buydown. This lowers interest by two percentage points during the first year you have the loan and one point during the second year. After that, interest returns to the original rate.

"Homebuyers can have a lower payment for two years and ideally be able to refinance right as rates are coming down in the future," says Steve Hill, lead mortgage broker for SBC Lending.

Point-based buydowns also known as Permanent buydowns are often done by buyers, agreeing to pay their mortgage lender money upfront in exchange for a lower rate. 

This practice is often referred to as buying mortgage points, as you'll pay one "point" and, in return, get an incrementally lower interest rate. The more points you buy, the lower your rate goes. (Though lenders may put a cap on how many points you can purchase).

Buying Down a Rate

Inform your lender if you want to lower your interest rate. They can guide you through temporary or permanent buydown options.

For a permanent buydown, you buy mortgage points, each costing 1% of the loan amount and reducing the interest rate by about 0.25%. Pay these fees along with closing costs and your down payment at closing.

Buydowns can also be purchased by other parties, often used to secure buyers in competitive markets or attract borrowers when rates are high. Sellers might offer buydowns to enhance home appeal without lowering the price. Homebuilders may provide buydowns to promote new construction sales.

How much does it cost to buy down your interest rate?

If a lender or seller offers to pay for your buydown, that's a win-win, even if it's temporary (as long as you can handle the higher payment later on). 

To buy points, do some calculations. The cost depends on how much you want to lower your rate. A discount point typically costs 1% of the loan amount and reduces the rate by a quarter-point.

For instance, if you're borrowing $350,000 at 7% and want to reduce it by half a percentage point, you'll need two discount points. One point costs $3,500 on a $350,000 loan, so you'll pay $7,000 to lower the rate to 6.50%.

Given the upfront cost, calculate the break-even point to see if it's worth it. We'll explain this math later.

Benefits of mortgage rate buydowns

The benefits of buying down a mortgage rate primarily pertain to affordability. 

Lower monthly payments 

First, lower rates mean buyers get a lower monthly mortgage payment. This could help them afford a home more easily and without stretching their budget. 

Long-term interest savings

Reducing your mortgage rate can save you significantly on interest costs. For example, a permanent rate buydown from 7% to 6% on a $400,000 loan:

Considerations before buying down your interest rate:

Analyzing the break-even point and long-term homeownership plans:

To conduct a cost analysis of mortgage rate buydowns, calculate the break-even point by dividing the total cost of the points by the monthly savings obtained. This calculation will indicate the number of months required to break even.

Decide how long you plan to stay in the home.  If you'll reach the break-even point, a buydown is likely beneficial.  If unsure, it could be risky.

Consider your future finances with a temporary buydown. When it expires, your rate and payment will return to the original ones quoted by your lender. Ensure you can afford the increased payment to avoid foreclosure.

Getting a lender-paid or seller-paid mortgage rate buydown

Buying down your own rate is straightforward, but getting someone else to pay requires negotiation. Here are strategies for negotiating rate buydowns with lenders and sellers:

Negotiating with lenders and exploring lender credits

Shop around with the best mortgage lenders and look for promotions. If rates are high, some lenders may offer buydown promos to attract buyers. If not, get quotes from several lenders and use them to negotiate better terms. Some lenders might offer temporary buydowns to stay competitive.