Interest Rate Buydowns
An interest-rate buydown is a tool to help you qualify for a larger loan and purchase a higher-priced house than you could under normal circumstances. With the sharp increase in interest rates, buydowns are becoming a popular tool for motivated sellers wanting to sell their homes. With a buydown a seller will pay extra points up front for a buyer in return for a lower interest rate for the first few years.
The most common is the 2-1 buydown, which can cost 3 additional points above current market points. During the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.
Another option is the 3-2-1 buydown. This reduces the mortgage rate 3 percent the first year, 2 percent the second and 1 percent the third. Thereafter you pay the full rate.
This is a great way for buyers to enjoy a lower interest rate for a few years until interest rates go down again and they can refinance.