When mortgage rates are on the rise, your lender may offer a mortgage rate buydown to help temporarily or permanently reduce your interest rate. This can help you save money by lowering your monthly payments during the initial loan term!
Temporary Buydowns
Whether a buydown is an option for you to consider depends on many factors, such as how long you plan on staying in the home and your current and future income. If you expect a higher income in the future, using a temporary buydown can allow you to save early on before subsequently easing into higher monthly payments when your income increases over the years.
The most common mortgage buydown structures lenders use are 3-2-1 buydowns and 2-1 buydowns.
3-2-1 Buydowns
A 3-2-1 buydown enables a buyer to pay less interest on their mortgage for 3 years after obtaining the loan. The points paid upfront reduces the interest rate by 1% for each of those first 3 years. For example, say a homebuyer qualifies for a 30-year mortgage at an interest of 5%. With the 3-2-1 buydown, they would pay an interest rate of 2% the first year, 3% the second year and 4% the third year but would have to pay the full 5% from years 4 – 30.
2-1 Buydowns
A 2-1 buydown applies to only the first 2 years of the loan where the interest rate would be 2% lower in the first year and 1% lower in the second. Using the previous example, the buyer would be expected to pay an interest rate of 3% the first year, 4% the second year and 5% from years 3 – 30.
Permanent Buydowns
Unlike the 3-2-1 buydown and 2-1 buydown, both of which only lower the interest rate for a fixed period of time, a permanent buydown extends over the entire tenure of the loan. However, this usually involves paying more money upfront. This initial amount varies from lender to lender.
If you are interested in learning more about mortgage rate buydowns, reach out to your Pulte Mortgage Loan Consultant today!
