07/03/2024
Want to purchase a home but don’t want to buy with the current interest rates?
Consider a rate buy down! These can be paid by the SELLER, saving you hundreds to thousands a month on your mortgage while you wait for rates to drop and snuggle into a lower permanent rate!
How does a buydown work?
Mortgage buydowns are temporary financing arrangements that can be structured in a few different ways. Here are some of the most common buydown structures:
3-2-1 buydown: Your interest rate is reduced by 3% for the first year. It will then increase by 1% per year for the next three years. You’ll start paying the full interest rate in the fourth year.
2-1 buydown: Your interest rate is reduced by 2% in the first year and then increases by 1% per year for the next two years. You’ll start paying the full interest rate in the third year.
1-1 buydown: Your interest rate is reduced by 1% in the first year and increased by 1% in the second year. You’ll start paying the full interest rate in the second year.
Mortgage buydown example:
Suppose you’re buying a home with a market value of $300,000 with a 30-year mortgage and an interest rate of 7%. Based on those numbers, your monthly principal and interest payment would be $1,995.
Now let’s say you and the seller negotiate a 3-2-1 buydown. The seller pays the fee as a concession, which will help save you money for the first few years of homeownership. In the first year of the mortgage, you pay 4% instead of 7%, meaning your mortgage payment is only $1,432.
In the second year, your interest rate increases to 5%, and your payment increases to $1,610. In the third year, your interest rate increases to 6%, and your payment increases to $1,798. It’s not until the fourth year of the mortgage that your interest rate reaches 7%, and you pay the full monthly payment. Your total interest savings would be roughly $13,750 over three years. You can also refinance during this time into a lower permanent rate!