It's an interesting time to be a home buyer. On one hand, it is a great relief that the market is finally slowing, there is more inventory, less competition, and even price reductions on homes. On the other hand, the rising mortgage rates have decreased buying power, and it is hard to imagine paying close to twice as much in interest as you would have several months ago.
Interest rate buydowns are a great way to help offset rising mortgage rates. By paying more money upfront or negotiating with sellers, it is possible to secure a lower interest rate on your mortgage when you buy a home.
For a permanent buydown, you purchase discount points from the lender. The more discount points you purchase, the lower the interest rate is on your mortgage. The cost of a permanent buydown is higher than a temporary buydown, but it gives you the security of knowing what your rate will be for the life of the loan.
With a temporary buydown, the mortgage rate on your loan is lower at first but eventually increases. Temporary buydowns are structured in a few different ways, the most common are the 3-2-1 buydown and the 2-1 buydown. With a 3-2-1 buydown, a buyer pays 3% below the prevailing mortgage rate for the first year of their loan, 2% below the following year, and 1% below on the third year. After the third year, the buyer will have to pay the prevailing rate that was set at the time they purchased the loan.
With a 2-1 buydown, the buyer pays a discounted interest rate for the first 2 years of the loan. On the first year, the interest rate is 2% lower the first year, 1% on the second year, and by the third year, the buyer pays the prevailing rate.
This is where things get interesting, in a competitive real estate market buyer has been the one responsible for paying for an interest rate buydown. But recently we’ve noticed a few homes on the market that are offering cash towards an interest rate buydown, like this one. As the market shifts, an interest rate buydown is something that a buyer could potentially negotiate with a seller. Keep in mind that money towards an interest rate buydown will lower your monthly payment more than a price reduction or below asking price offer of the same amount would.
This is certainly something to discuss with your real estate agent and your lender. If you don’t have one yet, let us know so we can connect you with someone who can help!
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