With today’s high-interest rates and affordability challenges, many homebuyers are focused on making the most out of their budget when purchasing a home.
One option is temporary rate buydowns, which make their initial mortgage payments more manageable and provide financial flexibility in the early years of homeownership.
What is a temporary rate buydown? How do they work?
A temporary buydown, also known as a 3-2-1, 2-1 or 1-0 buydown, allows homebuyers to pay a reduced interest rate for the first few years of the loan. This typically occurs when the seller of the property contributes funds into an escrow account to contribute to the difference in payment. The additional funds paid upfront by the seller are used to temporarily reduce the interest rate on the mortgage, making homeownership more affordable in the early years.
3-2-1 Buydown: The interest rate is reduced for the first 3 years of the loan.
- Reduced by 3 percent year one
- Reduced by 2 percent year two
- Reduced by 1 percent year three
- Contractual interest rate applied to years 4 through 30
2-1 Buydown: The interest rate is reduced for the first 2 years of the loan.
- Reduced by 2 percent year one
- Reduced by 1 percent year two
- Contractual interest rate applied years 3 through 30
1-0 Buydown: The interest rate is reduced for the first year of the loan.
- Reduced by 1 percent year one
- Contractual interest rate applied years 2 through 30
Carrington Mortgage Services, LLC offers seller-paid buydowns on our government and conventional purchase loans, where the seller of the property contributes funds to buy down the interest rate for the buyer. This can be negotiated as part of the real estate transaction and can provide buyers with immediate savings on their mortgage payments.
The mechanics of a buydown are relatively straightforward. The additional funds paid upfront are put into an escrow account, which the lender uses to make up the difference between the reduced interest rate and the actual interest rate on the loan. This allows the homeowner to pay a lower monthly mortgage payment during the buydown period.
What are the benefits of a buydown?
While buydowns may not be available for every homebuyer, they do offer several benefits that can make homeownership more affordable and appealing. Here are some key advantages of buydowns:
- Lower Monthly Payments: The most obvious benefit of a buydown is the temporary reduction in monthly mortgage payments. By having the seller pay upfront costs, homebuyers can secure a lower interest rate and consequently lower their monthly payments for the buydown period. This can be particularly helpful for first-time homebuyers or individuals with tight budgets.
- Financial Flexibility: By temporarily reducing monthly mortgage payments, a buydown provides homebuyers with more financial flexibility. The money saved each month can be allocated towards other expenses or savings goals, such as paying off high-interest debt, building an emergency fund, or investing in home improvements. This flexibility can help them achieve their financial objectives while still enjoying the benefits of homeownership.
Interested in learning more about buydowns? Contact us at 800-202-8934 and find out if a buydown is right for you.