Interest Rate Buydowns - A Win-Win for Buyers & Sellers
JoJo on Apr 11th 2007
What Is It? A type of financing where the buyer or seller pays extra points (often called discount points) in return for a lower interest rate.
The low-down on buydowns is that they are commonly used to make qualifying for a loan easier since they lower a loan’s interest rate. Most common is the temporary buydown where you prepay interest in exchange for a lower rate on the first 2-3 years of a loan. Often the builder, seller or lender, all who want to make the housing more attractive to buyers, will pay for the buydown. Also, the lower starting rate makes it easier for the buyer to qualify for the loan.
Example: How do you do a temporary 3-2-1 buydown for a $250,000 fixed rate loan?
Step 1 (Chart shows lower payments for the Buyer)
| Year | Buydown Rate | Monthly Payment with Buydown Rate | Market Rate | Monthly Payment at Market Rate |
| 1 | 5% | $1,445 | 7% | $1,732 |
| 2 | 6% | $1,587 | 7% | $1,732 |
| 3-30 | 7% | $1,732 | 7% | $1,732 |
Step 2 (Chart shows buydown cost to builder, lender or seller)
| Year | Monthly market payment- buydown payment x 12 months | Result |
| 1 | ($1,732 - 1,445) x 12 | $3,444 |
| 2 | ($1,732 - 1587) x 12 | + 1,740 |
| 3-30 | ($1,732 - 1,732) x 12 | + 0 |
| You pay at closing: | = $5,184 |
This mortgage option is a win-win situation for both Buyers & Sellers. The Buyer gets lower payments for the first two years, which can enable them to get into a home which they might not using a conventional mortgage. . . and although the Seller or Lender has some out of pocket costs at closing, the house gets sold, and this cost is usually much lower than taking a price reduction.
For more information on this type of loan, call me at 949-244-0719 so I can put you in contact with our local lender in the South Orange County California area.
