What Is A Temporary Rate Buydown?

Great question!

Buying down the rate can lower the rate permanently (for the entire life of the loan) or temporarily, for the first year or two. Let’s explore temporary rate buydown options.

A 2/1 mortgage rate buydown is a type of financing arrangement that temporarily reduces the interest rate on a mortgage for the first two years. Here’s how it typically works:

• First Year: The interest rate is reduced by 2 percentage points below the loan’s permanent rate.
• Second Year: The interest rate is 1 percentage point lower than the permanent rate.
• Third Year and Beyond: The interest rate returns to the original, permanent rate agreed upon when the loan was taken out.

For example, if the permanent rate on a 30-year mortgage is 5%, with a 2/1 buydown, the borrower would pay an interest rate of 3% in the first year, 4% in the second year, and then 5% for the remaining term of the loan.

A 1/0 mortgage rate buydown is a financing strategy where the interest rate on a mortgage is reduced by 1% for the first year of the loan term. After the first year, the interest rate returns to the original, higher rate that was agreed upon in the mortgage contract.

These buydown strategies can be beneficial for borrowers who anticipate a higher income in the future and can afford the increased payments after the initial buydown period. It’s also used by sellers or builders as an incentive to make a property more attractive to buyers.