Mortgage Interest Rate Buydowns

Real Estate

Mortgage Interest Rate Buydowns

With mortgage interest rates increasing you may want to try this strategy. You might even get the seller to pay for it. 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 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.

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

Some programs are “flex-fixed” buydowns that increase interest at six-month intervals instead of annually.