With mortgage interest rates rising, buyers are looking for ways to reduce their payment. One way to do this is with a buydown.

There are temporary and permanent buydowns. Temporary buydowns are trending. Temporary buydowns reduce the rate one year at a time, gradually increasing to the negotiated rate. Temporary buydowns can be 3/2/1, 2/1, or 1/0. A 3/2/1 buydown means the rate is reduced by 3% for the first year of the loan, 2% for the second year of the loan, and 1% for the third year of the loan. For example, if today’s rate is 7%, then the rate would be 4% for the first year, 5% for the second year, and 6% for the third year, returning to 7% for the remainder of the loan term. A 2/1 buydown reduces the rate by 2% the first year, and 1% the second year. A 1/0 buydown reduces the rate by 1% for the first year.

The temporary buydown must be paid by the seller. The cost is the total in savings over the buydown period. In the 3/2/1 buydown example above, the total cost would be the difference in payment between 4% and 7% in the first year, plus the difference in payment between 5% and 7% in the second year, plus the difference in payment between 6% and 7% in the third year. When you are making your payments during the buydown period, the lender is still being paid at the 7% Note rate. The lender collects the difference from the amount funded by the seller at closing.

The other option is a permanent buydown. Under this option, the rate is reduced for the entire loan term. This buydown can be paid by the buyer or seller.

If you are looking for ways to reduce your payment, give us a call.