While purchasing a home is an expensive undertaking, we’re always looking for ways to make it more affordable. It shouldn’t be just left to the borrower to shop mortgage rates and negotiate prices; there are programs mortgage lenders can make available on their end to ensure their customers have a manageable monthly mortgage payment.
One of these options is what is known as a temporary buydown.
Temporary Buydowns allow buyers to get a more affordable monthly payment on the front end of their mortgage. The benefit provides a lower start rate, but the stability of a fixed-rate. This is done in anticipation that the borrower will have higher earnings within a few years of obtaining the mortgage.
Temporary buydowns are available on most loan programs, like conventional, FHA, and VA.
If a buyer chooses to use a temporary buydown, an upfront cash deposit is required. This cash deposit is called a buydown fee and is what offsets the discounted interest on a mortgage. This deposit is then put into an escrow account that subsidizes the loan for the first few years of its life.
The buyer’s rate is “bought down” based on how many years the loan will be subsidized. The most common buydowns are a 2-1 or a 3-2-1 where the rate is ‘bought down’ for those first two or three years respectively, and the cost of the buydown is either paid by the seller or lender.
One of the benefits of a temporary buydown is that it allows borrowers to plan their budget for the next few years. Unlike an adjustable-rate mortgage (ARM), borrowers with a temporary buydown have a more predictable loan payment schedule.
A temporary buydown is different from buying points, also known as discount points to reduce the interest rate in that when buyers buy points, the interest rate is bought down for the life of the loan. Temporary buydowns lower the rate during the initial buydown period. The rate gradually returns to the regular rate after the temporary period expires.
When deciding between an ARM, buying points or a temporary buydown, it is important to work closely with your lender to understand the risks and benefits associated with each.
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