Mortgage Buydowns: The Latest Real Estate Trend

What Is It?

A mortgage buydown allows you to pay an initial lump sum to your lender in exchange for a lower interest rate on your mortgage. So, you are essentially “buying down” your mortgage’s interest rate. The interest rate reduction typically only lasts for the first 1 to 3 years of the mortgage, but can sometimes last for the entirety of the loan.

With the average interest rate for a home currently well over 6%, this financing strategy is becoming increasingly popular, as it provides homeowners a lower monthly payment on their homes.

Varying Structures

There are several different forms mortgage buydowns might take. What’s known as an evenly distributed rate reduction is essentially the same as a permanent rate buydown. So, while you pay more up front, a lower rate applies for the life of the loan, benefiting buyers who plan to own their homes for a long time.

The temporary approach, which is more affordable, comes in the form of a 3-2-1 buydown, or a 2-1 buydown. In the 3-2-1 approach, year one offers the lowest rate, with a gradually increasing rate in years two and three. From year four through 30 – the most common term – the rate is fixed at the permanent amount.

The 2-1 structure is identical, except you’re paying the permanent rate by year three. Both upfront cost and total savings will be less than a distributed rate reduction or 3-2-1 buydown.

Pros and Cons

Using a mortgage buydown can be an effective strategy to help make moving into your preferred home more affordable. On top of that, in certain cases, you can even use the cost of your buydown as a tax deduction.

However, remember that, in most cases, the interest rate reduction is temporary. You’ll need to meet the full monthly payments at some point, even if it’s years down the road. The last thing you want to do is buy down a mortgage that you can’t afford, only to struggle with the payments once you’re settled in your new home. So, consider how much you stand to save from a mortgage buydown compared to full monthly payments – and if you can manage both – before you buy.

That said, the next time that you’re shopping for a home, be sure to ask your lender about mortgage buydowns. It might be just what you need to seal the deal.

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