What are temporary buydowns?
A temporary buydown lowers the interest rate to a certain percentage, which then increases each year until it returns to the original rate. Common temporary buydown terms are 2-1 and 1-0, where the first number is the rate reduction you receive in the first year and the second number is the rate reduction for year two.
With a 2-1 buydown, a 7.25% mortgage rate would be cut to 5.25% the first year, increase to 6.25% in year two and return to 7.25% in the third year. Here’s what that looks like for a $500,000 loan balance.
A temporary buydown is typically paid for by either the seller, homebuilder or lender and it effectively offsets a portion of the buyer’s monthly payment. From the example above, it would cost $11,784 for the full 2-1 buydown, which is the total amount the buyer saves. The money used to lower the buyer’s monthly payments is deposited into an account and taken out each month by the mortgage loan lender. Keep in mind, with a temporary buydown the borrower needs to qualify for the home loan based on the full interest rate after the buydown expires.
The Expectation is the opportunity to refinance over the next 3 years into a lower 30 year fixed product will present itself that you can get into while gaining some appreciation. Some lenders may also have low costs or no-cost refinance options by keeping the loan with them (ask).
As they say: Marry the home, date the rate!