Interest Rate Buydowns
In certain markets, Interest Rate Buydowns may be available. In general Buydowns this is how they work. Payments are reduced and figured on a lower interest rate over a specific term. The difference between the “real” note rate and the lowered interest rate is paid in cash by the seller or the buyer. The more common buydowns are 3-2-1 and 2-1.
For example, the 2-1 Buydown with a loan amount of $350,000 which has a fixed interest rate 6.75% for 30 years. To “buy down” the interest rate, the cost would be a lump sum of $8,063.
- First-year interest rate is 4.75%, monthly payment is $1,826.
- Second-year interest rate is 5.75%, monthly payment is $2,043.
- Years three through 30, interest rate is 6.75%, monthly payment is $2,270.
- 1st-year savings (as compared to $2,270 per month) is $444 per month or $6,332.
- 2nd-year savings (as compared to $2,270 per month) is $228 per month or $2,731.
Add up the annual savings: $6,332 + $2,731 = $8,063. Therefore, it costs $8,063 to buy down the interest rate and payments for two full years.
Contact your mortgage professional to discuss the availability of these options for you
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Interest Rate Buydown: What it is and How to Get One
What is an interest rate buy-down?
An interest rate buydown is when money is paid in the early stages of a loan in order to reduce a loan’s interest rate. This typically occurs by paying additional charges at closing in the form of points. Points will allow the interest rate to decrease a certain percentage based upon how many points are bought.
The interest rate buydown allows individuals to afford payments early in the home buying process. Taking a percentage or two off of a mortgage payment can save the new homeowner hundred of dollars a month. This is a great way to allow new homeowners to get into a house without feeling the financial burden immediately. A professional lender can help in understanding this process.
The decrease in monthly payment due to a lower interest rate will also help on the backend by decreasing the total amount owed on the mortgage. However, sometimes the seller will increase the total selling price for the house to make up on any lost profits. Also, the interest rate will usually increase in a few years until it reaches a flat rate. The seller truly is important to having an interest rate buydown. For example, the seller will most often put money into an account for a buydown. This will allow the loan to be subsidized. They buyer will then have a lower monthly payment.
Buying Down an Interest Rate
Another option to having an interest rate buydown comes from the future homeowner paying for points. Bank of America has said, mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate.” At times, buyer has control of their interest rate. They must buy points which will increase the interest rate. This usually will cost in the thousands of dollars to obtain a point.
If mortgage points can be purchased, the amount of interest for the life of the loan will be less. Buying down interest in this way takes money up front, which is why the seller subsidizing the loan may be a more appealing option.
An interest rate buydown is an appealing option for many homebuyers. It is a technique to attract future homeowners by showing them that their early monthly payments will be a lot lower than normal. As state earlier, this decreased monthly payment will usually rise to a typical interest rate in a couple of years.
Should I get an interest rate buydown?
There are a lot of good things that come from an decreased interest rate. More individuals can get into a home because they can afford the payments. Also, lower payments means that the extra money normally spent can be put in different places. This extra money can be saved, pay off other debts, or used for other necessities.
The thing that should be understood going into an interest rate buydown is that the rate will most likely increase in a few years. However, this temporary decrease in rate can allow future homeowners to fully cover payments.
It must also be understood that the buyer may have to pay for mortgage points. So the question becomes whether or not the buyer has extra money to pay for mortgage points. The other option is that the seller subsidizes the mortgage at the beginning which in turn decreases the interest rate.
The buyer should consult a professional to determine the best possible outcome. If there is money to be paid for points, that may be a great option to save some money down the road. However, if that is not an option, there will have to be some negotiation with the seller. There are professionals at Home Mortgage and they can be contacted at any of the following locations:
- Queen Creek
- Sun City West
- Litchfield Park
- Paradise Valley
- Casa Blanca
- Chandler Heights
- Sun Lakes
- Cave Creek