What is an Interest Rate Buydown?
An interest rate buydown happens when the seller or builder of the home “buys down” the interest rate for the buyer for a set period of time. Usually for 2 or 3 years. A buydown will help you with lowering your monthly mortgage payments for a few years.
There are two common interest rate buydowns available today. A 3-2-1 buydown and a 2-1 buydown. The difference between the two is the length and the cost.
In a 3-2-1 buydown the loans interest rate is reduced by 3% the first year from the start interest rate, 2% lower the second year and 1% lower the third year. Example: your start interest rate is 6.375%, in a 3-2-1 buydown the 1st year you will be paying a 3.375% interest rate, the 2nd year it would be 4.375%, the 3rd year it would be 5.375%, and from then on it would be 6.375%.
A 2-1 buydown is where the interest rate is reduced 2% for the first year, then 1% lower for the 2nd year, and from then on it would be the original rate.
Who pays for the buydown?
The seller or builder pays for the buydown. When you are negotiating buying a home a lot of times sellers or builders will offer to pay for some of your closing costs. For example, if the seller is offering to pay $15,000 in closing costs, they can actually split that amount so some of the money will go towards the interest rate buydown and the rest will go towards your closing costs. It’s a win-win for everyone.
Who is a buydown good for?
Buydowns are good for anyone that is buying a home or condo for themselves. There are many reasons to take advantage of this program, especially if you like to save money. If you are expecting a better job or a raise in the next year or two. Maybe you are graduating from college and will be entering into a high paying career but not quite there yet. Or you are possibly betting that the interest rates will be going down and you will refinance in 2 or 3 years. Whatever your reason, it’s to your advantage to take part in this program.
How can I get more information?
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This is just one of the programs that I can help you with in 2023. There will be more tips and tricks coming.