As inflation holds tight and mortgage rates continue to fluctuate between 6% and 7%, many homebuyers are feeling the financial strain of saving for a down payment, closing costs, and the overall affordability of a mortgage.
If you’re finding yourself in this position, there is a way that you can make your monthly payment more affordable and pay less interest.
What is a Mortgage Rate Buydown?
A mortgage rate buydown, also known as a rate buydown, involves the borrower purchasing mortgage points (also known as prepaid interest points) to lower the interest rate on their loan, and is paid through a one-time upfront fee. This can result in significant savings over the life of the loan.
Types of Buydowns
Buyers have the option to choose between a temporary buydown and a permanent buydown.
Temporary Buydown
In a temporary buydown, the interest rate is lowered for the first few years of the loan and then gradually increases back to the original rate. Here at Ruoff Mortgage, we offer:
· 1-1 Buydown: The interest rate drops by 1% for the first year, 1% in the second year, and then returns to the original rate.
· 2-1 Buydown: The rate is reduced by 2% in the first year, 1% in the second year, and then reverts to the original rate.
Permanent Buydown
A permanent buydown locks in the reduced interest rate for the entire life of the loan. This requires a larger upfront payment compared to a temporary buydown but offers long-term stability and savings on interest payments.
When Can You Use a Buydown?
Buydowns can be utilized when purchasing or refinancing a primary residence or a second home. They are not available for investment properties or cash-out refinances. Additionally, the buyer must qualify for the standard rate of a zero-point loan, and buydowns are generally not applicable to Adjustable Rate Mortgages (ARMs) unless the initial interest rate period is at least three years.
Buyer, Seller, and Builder Contributions
While buyers typically negotiate the terms of a buydown, sellers and builders can also contribute. Sellers might offer a buydown as an incentive to make their property more attractive, often incorporating the cost into the sale price. Builders might offer buydowns to entice buyers to new developments, although this practice becomes less common as the community becomes established.
Benefits of a Rate Buydown
· For Buyers: A rate buydown can make homeownership more affordable.
· For Sellers: Offering a buydown can make a property more attractive in a competitive market, helping to close deals faster.
· For Builders: Providing buydowns can boost sales in new developments by reducing initial costs for buyers.
Considerations and Limitations
Before deciding on a buydown, here are a few things you should consider:
· Eligibility: Only applicable for primary residences and second homes.
· Upfront Costs: Buyers need to evaluate whether the upfront cost of purchasing points is worth the long-term savings.
· Break-even Point: It's essential to consider how long you plan to stay in the home to determine if the savings will outweigh the initial expense.
A mortgage rate buydown may be a valuable tool for both buyers and sellers in the current market. By understanding the types of buydowns available and how they work, you can make an informed decision that best suits your financial needs. Whether you're looking to save on interest payments in the short term or lock in a lower rate for the life of your loan, a rate buydown may be the right strategy for you.
Talk to one of our Ruoff Mortgage experts to see if a rate buydown is a good option for you.