What Is A Temporary Rate Buydown?

Great Question!

A temporary rate buydown is a way to lower the interest rate on a mortgage for a short period of time, usually one to three years. This can make the monthly payments more affordable for the borrower, especially in the beginning of the loan term. A temporary rate buydown is different from a permanent rate buydown, which reduces the interest rate for the entire duration of the loan.

There are two ways to use a temporary rate buydown when buying a home:

• The seller can offer to pay for the buydown as a concession to attract buyers. The seller would deposit a lump sum of money into a buydown account, which the lender would use to subsidize the interest rate for the borrower. The seller can also deduct the cost of the buydown from the sale price of the home.
• The borrower can pay for the buydown themselves, either with their own funds or with a gift from a relative or a nonprofit organization. The borrower would need to have enough money to cover the buydown cost, as well as the down payment and closing costs.

A temporary rate buydown can be structured in different ways, depending on the lender and the agreement between the seller and the buyer. One common example is a 2-1 buydown, which means that the interest rate is reduced by 2 percentage points in the first year, and by 1 percentage point in the second year, before returning to the original rate in the third year. Another example is a 3-2-1 buydown, which reduces the rate by 3, 2, and 1 percentage points in the first, second, and third year, respectively.

A temporary rate buydown can be beneficial for both the seller and the buyer, as it can help them close the deal faster and save money on interest. However, there are also some drawbacks and risks to consider, such as:

• The borrower may not qualify for the loan based on the original interest rate, which could limit their options for refinancing or selling the home in the future.
• The borrower may not be able to afford the higher payments after the buydown period ends, especially if their income or expenses change.
• The seller may lose some profit from the sale of the home, as they have to pay for the buydown or lower the price.
• The buydown may not be worth the cost, depending on how long the borrower plans to stay in the home and how much the interest rate changes over time.

Therefore, before using a temporary rate buydown, it is important to compare the costs and benefits of different scenarios, and consult with a mortgage professional and a real estate agent. You can also use online calculators to estimate how a buydown would affect your monthly payments and total interest.