Nov 09 2023

How to use a Buydown to reduce your interest rate


How can you find the lowest rate in today’s market? A Temporary Buydown could offer a solution.

Strengthening your credit score, having a good DTI (debt-to-income ratio), and increasing your down payment may all help you qualify for a more competitive interest rate. Using a Temporary Buydown could help to reduce your mortgage rate even further.

What is a Temporary Buydown, and when should you use it?

Within the last two years, mortgage rates have been rising. They’re still below the historical average, but combined with increasing home prices, affordability has become a concern for many of today’s homebuyers. Understandably, homebuyers are looking for ways to counteract higher interest rates and keep their monthly mortgage payment manageable.

Presenting a lower offer on a house is one option. Across the U.S., sellers have become more flexible to compensate for a drop in buyer demand. Some have been forced to cut their prices. That said, a seller who has lowered their price may not be willing to reduce it any further.

Using option number two—a Buydown—can make more sense. A Temporary Buydown helps to:

  • Increase the appeal of your offer.
  • Lower the initial interest on your loan—lowering initial monthly payments.
  • Net the seller more overall profit.

A Temporary Buydown may be available as a 3/2/1, 2/1, or 0/1 Buydown Mortgage (though loan programs and terms may vary). It can be a great option for both new and repeat homebuyers who want to save money on their mortgage. A Temporary Buydown may be compatible with most loan types, including Conventional, VA, and FHA.

A Buydown allows you to purchase a home with a lower interest rate for the first one, two, or three years of your mortgage, depending on whether you’re using a 3/2/1, 2/1, or 0/1 Buydown. This may make it possible to purchase your dream home sooner. After the Buydown period ends, your payments will be fixed for the remaining life of your loan, removing all uncertainty of future increasing payments.

Here’s what this might look like using a 3/2/1 Buydown as an example:

  • In year one: The interest rate is reduced 3 percent below the rate on your mortgage note.
  • In year two: The interest rate is reduced 2 percent below the rate on your mortgage note.
  • In year three: The interest rate is reduced 1 percent below the rate on your mortgage note.
  • In year four: The interest rate increases to the full rate as required by your note, and it stays at this fixed rate for the remaining years.

Reducing an interest rate can help to reduce a monthly mortgage payment, often by several hundred dollars.

Could a Temporary Buydown help you get into a home you love?

Let’s discuss your options.

The cost of a Buydown must be paid upfront before closing on a mortgage. But by who? A Temporary Buydown can be funded by a seller, a builder, or a lender. The cash deposit for the Buydown is then placed in escrow and used to cover the difference of the reduced rate for the first few years of the mortgage.

Why would a seller agree to buy down your interest rate?

Rather than presenting a lower offer, many buyers are seeing more success in negotiating seller concessions. Essentially, this means asking a seller to pay part of your closing costs to close the deal. Concessions can also cover the cost of a Buydown, appraisals, lender fees, and any other expenses, excluding your down payment.

To pay for concessions, a seller won’t discount their home’s price. Instead, they’ll usually increase its asking price by the amount needed for a Buydown.

Why would a seller do this? A Temporary Buydown benefits both the seller and the buyer:

  • For a homebuyer: A Buydown can reduce initial interest, help temporarily lower a monthly payment, and make homeownership more affordable for the first few years.
  • For a seller: Offering incentives like a Buydown could attract buyers, speed up the sales and closing process, and, ultimately, help to increase profits more than reducing the asking price on a house.

If a seller cuts a home’s price, a buyer will save some, but a seller will lose this profit. Using a Buydown is more likely to yield greater initial monthly savings for the buyer, as well as greater net profit for the seller. Whether you’re listing or making an offer on a house, it helps to remember that this is a more beneficial form of negotiation.

When used strategically, a Temporary Buydown can help a buyer get into a starter home at an affordable price, acclimate to homeownership while building equity, and then eventually trade up to a bigger house.

If you want to save on your first years of homeownership:

A Buydown may be the solution. Contact your local Academy Loan Officer to learn more.

All mortgage products are subject to credit and property approval. Rates, program terms, and conditions are subject to change without notice. Not all products are available in all states or for all amounts. Additional conditions, qualifications, and restrictions may apply. Please contact Academy Mortgage for more information. MAC2411-2179857.