Interest Rate Buydowns

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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. A buydown allows you to pay extra (tax-deductible) points up front in return for a lower interest rate for the first few years. Often, people relocating for employment obtain buydowns because employers sometimes pay the extra points as part of a relocation package.

While the most common way of obtaining a buydown is by paying extra points up front, many mortgage companies now increase the note rate to cover the cost in later 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 then for the second year it is reduced by 1 percent. So, if you get a 5 percent interest rate on a 30-year fixed mortgage, you’d pay 3 percent the first year, 4 percent the second year, and 5 percent for the remaining life of the loan.

Another option is the 3-2-1 buydown. This reduces the mortgage rate by 3 percent for the first year, 2 percent for the second year and 1 percent for the third year. Thereafter you pay the full rate.

If you ever have questions be sure to talk to your lender or financial advisor. As always, if you need some referrals, feel free to contact me anytime.