Take On High Rates with a Buydown

When you’re ready to obtain a mortgage loan, there is actually something you can do to ensure your mortgage payments are more manageable in the future. A buydown mortgage is a financing technique that allows a borrower to obtain a lower interest rate by paying an extra up-front payment or discount points at closing. The buydown can last for the entire life of the loan or for a specific period of time, such as the first two or three years. Buydowns are only eligible when purchasing or refinancing primary residences and second homes. Typically, buyers must qualify for the standard interest rate of the zero-point loan to be able to buy down a home loan.

Two popular options are temporary and permanent buydowns. Both lower your initial loan’s interest rate in exchange for a lump sum payment. This payment can be made by you, your home’s seller or builder, or lender.

Here’s more about each type of buydown. Temporary buydowns are designed to assist buyers during their first one to three years of home ownership.

Here are the most common buydowns:

• A 1-0 buydown reduces the loan’s interest rate by 1% for the first year of its term before it reverts to its original rate.
• A 2-1 buydown reduces the buyer’s rate by 2% during the first 12 months and 1% during the second year before reverting to the loan’s original rate.
• The 3-2-1 buydown works like the previous two options, reducing the interest rate by 3% in the first year, 2% in the second year, and 1% in the third year.

Any of these will benefit your cash flow, especially if you’ll need to purchase appliances and furniture for your new home. Another option: permanent buydowns. These come in the form of discount points, which are up-front fees paid in exchange for a permanently lower interest rate. One point typically equals 1% of the loan amount. A discount point can represent a rate reduction of up to 0.25%, depending on the offer.

When making a decision about rate buydowns, think about what you want out of a home (and your mortgage). If getting a low rate is a top priority, then a seller-paid buydown can help you achieve that. But if you plan on refinancing to a lower rate, then mortgage discount points may not be worthwhile – although a temporary rate buydown can still help you save money in the near term. Be sure to discuss your options with one of Core Bank’s team of lenders. We are committed to helping you achieve your dreams, whether you’re ready to buy, build, or refinance your home. We also have a 21 calendar day closing guarantee for conventional conforming loans.