What is a Buydown Mortgage?
A buydown mortgage is a financing technique to obtain a lower interest rate for your loan term. By paying discount fees upfront at closing, you literally “buy down” your interest rate.
What are the different types of a Buydown Mortgage?
One of the most popular buydown mortgages is the 3-2-1 structure. A 3-2-1 buydown enables you to pay less interest on your mortgage for three years after receiving the loan. The points you pay upfront will reduce the interest rate by 1% for the first three years.
For example, let’s say you qualify for a 30-year fully amortized mortgage at an interest rate of 5% and borrow $400,000. You decide that you want to lower your interest rate for the first three years with a 3-2-1 buydown. Here you would pay an interest rate of 2% the first year, 3% the second year, 4% the third year, and the full 5% from years 4–30.
Another type is the 2-1 structure. The 2-1 buydown works similarly to the 3-2-1, but only for the first two years of the loan’s term. Here, the interest rate would be 2% lower in the first year and 1% lower in the second.
Let’s use the same scenario from above (30-year fully amortized mortgage at an interest rate of 5% and borrow $400,000) but with a 2-1 buydown structure. Here you would pay an interest rate of 3% the first year, 4% the second year, and the full 5% from years 3–30.
As you can see, with a 3-2-1 and 2-1 buydown, you can lower your monthly payments and save both monthly and annually.
Benefits of a Buydown
1. Rate Hike Protection
With rates forecasted to rise even further throughout 2022, the buydown method can be a useful tactic to protect yourself against rate hikes.
2. Long-Term Savings
Ensure a more manageable payment in the future when choosing a buydown mortgage. By paying discount points at closing, you can secure a slightly lower interest rate on your mortgage, lowering your monthly payment. Depending on the kind of buydown you choose, this may act permanently or just for the first few years of your loan. All in all, buydown mortgages lead to monthly and annual savings.
When does buying down a mortgage make sense?
Typically, buydowns are utilized to save money in the long run by paying more money upfront. If you plan to own the home for an extended period of time, a buydown may be an option for you. Other examples of when a buydown may make sense are if you’re a graduate student knowing your income will double upon graduation or if you’re a stay-at-home parent planning to return to work a couple of years after obtaining a loan.
Furthermore, if you’ve been saving to purchase a home for quite some time now and currently have an influx of cash available, buying down your interest rate upfront may make sense in the current economic climate.
There are plenty of mortgages to consider when purchasing a home. Just like every home and financial situation is different, every mortgage is different. Maronda Homes and our preferred lender, RMC Home Mortgage, are here to help find the best mortgage for you.
