I’ve been getting a lot of questions lately about buydowns and how they work.  They are becoming popular now because they have to be funded by the seller and sellers are willing to negotiate.  There is an increased supply of homes for sale, and sellers have been reducing their prices and giving concessions towards closing costs.  One thing that can help a buyer make the decision to purchase a home, is a concession towards a buydown.  

We are talking about temporary buydowns in this post, i.e. where the rate is bought down temporarily on an annual basis.  This is different than a permanent buydown, where the rate is bought down for the life of the loan.  

There are 3 different types of temporary buydowns, a 3/2/1, a 2/1 or a 1/0. Under the first option, 3/2/1, your interest rate is 3% lower in the first year of the mortgage, 2% lower in the second year, and 1% lower in the third year. Likewise, in a 2/1 buydown, your rate would be 2% lower in the first year and 1% lower in the second year. In a 1/0 buydown, your rate is 1% lower in the first year. The buydown is funded by the seller at closing, and is the culmination of the savings in mortgage payments over the temporary buydown period.  

Here’s an example.  Let’s say your interest rate is the current Freddie Mac 30-year fixed rate of 6.86%.  Also, let’s assume you are purchasing a $700,000 home, and putting 20% down, for a loan amount of $560,000.   During negotiations for the home, you ask the seller to pay for a 3/2/1 buydown, which would give you a 3.86% rate in the first year, 4.86% rate in the second year, 5.86% rate in the third year, and then 6.86% rate in the 4th year and for the remaining life of the mortgage.  The savings in payments in the first year, i.e. the difference in payment between a 3.86% mortgage and 6.86% mortgage is $1,044.66 per month, equaling $12,535.92 savings for the year.  The savings in payments in the second year is $714.72 per month, totaling $8,576.64 for the year.  The savings in payments in the third year is $365.95 per month, totaling $4,391.40 for the year.  So, the total the seller would have to pay at closing is $25,503.96 ($12,535.92 + $8,576.64 + $4,391.40).  

Before negotiating a buydown, be sure to contact us as there are limits on how much the seller can contribute towards closing costs.  Seller concessions depend on factors such as the amount of down payment, type of loan (i.e. conventional, FHA, VA), and whether you are purchasing a primary residence, second/vacation home, or investment property.  

If rates come down during the buydown period, you can refinance into a mortgage lower than the original rate (6.86% in the above example), and may never have to make a mortgage payment at that rate. 

If you are considering purchasing a home, or refinancing, either residential or commercial, give us a call.  This is what we do everyday, and can help find the right loan for you.