Unlike Permanent Rate Buydowns, Temporary Rate Buydowns help homebuyer’s lower their interest rate and monthly mortgage payment for a short period of time at the front end of their home loan.
Mortgage Buydown (Temporary)
Home loan interest rate buydowns can be a great option for homebuyers. In general, the term “mortgage buydown” refers to paying up front costs that result in an initial lower effective interest rate. There are 2 types of mortgage buydowns:
- Temporary Rate Buydown
- Permanent Rate Buydown
Temporary rate buydowns are often referred to as “2-1 Buydowns”. The numbers “2” and the “1” stipulate how much the borrower’s interest rate is reduced during year 1 and year 2 of the loan.
Temporary rate buydowns are available on select mortgage products only. Not all lenders offer temporary buydowns.
Benefits of Temporary Rate Buydowns
When a builder or seller contributes the funds for a temporary buydown, borrowers benefit from the savings a Temporary Rate Buydowns create during the initial years of their loan. For the first 2 years of a 2-1 buydown a borrower pays a reduced monthly mortgage payment due to the temporarily reduced interest rates as noted above in our example. Contact us to learn more.
Savings for the borrower can be substantial. For example, assume a buyer borrows $600,000 on a 30 year fixed Conventional home loan at 6% on a 2-1 temporary rate buydown. Their savings would look like this:
- Year 1: $7,328 saved
- Year 2: $3,763 saved
- Total Savings: $11,091 saved (Yr 1 + Yr 2)
In year 1, the borrower saves $7,328 due to their temporarily reduced 4% rate (instead of the full 6%).
In year 2, the borrower saves $3,762 due to their temporarily reduced 5% rate (instead of the full 6%).
From year 3 until the end of the loan this sample borrower’s rate would be 6%.