What Is an Interest Rate Buydown?

Now that interest rates are higher, buyers are looking for ways to lower their rate. A larger downpayment is one way you can lower your interest rate. But there are a couple of other ways you can lower your rate as well. Buying discount points with extra cash or seller concessions is a way to permanently lower your rate. On the hand, negotiating a temporary buydown paid by the seller would offer significant savings in the first few years with less money required up front. Let’s look at both options.

Discount Points

When you buy discount points (sometimes called mortgage points) you are prepaying interest up front at the time you close on your home purchase. Think of it like paying more now to save more later. One discount point is equivalent to about 1% of the total mortgage and can lower your interest rate a fraction of a percentage. Buying one discount point on a $200,000 loan would cost you $2,000 and bring your rate down by 0.125% – 0.25%. If you don’t have the extra cash to buy points, or enough to lower your rate to where you would like, seller concessions can be used to purchase discount points to permanently lower your interest rate. A permanent decrease in your interest rate will save you money over the lifetime of your loan. However, there is a limit to how low you can go when buying down your rate.

Temporary Buydowns

A temporary interest rate buydown would save you money in the first few years of your loan. The most common buydown is a 2-1 buydown. The first number represents the decrease in interest rate for the first year (2%) and the second number represents the decrease in interest rate during the second year (1%). The interest rate will return to the original market rate you qualified for by the third year. Can you guess what a 3-2-1 buydown is? That’s right, the first year’s interest rate will be 3% lower, 2% lower for the second year, 1% lower for the third year, and then a return to the original market rate the fourth year.

A buydown needs to be negotiated with the seller as part of your contact to purchase a home. The seller needs to agree to pay the amount of interest you would have paid for those first two years to your lender at closing for you to receive lower rates for the first two or three years. This can add up to significant savings in your monthly payment early on. It is important to understand your monthly payments based on the full rate, however, as that is the rate you will be paying for the remainder of your loan.

Find The Right Team

Whether you prefer a permanent change to your interest rate or a temporary one, working with the right team matters. We have you covered with the negotiations, but we can also recommend trusted lenders in our network. Together, we’ll work as a team to help you purchase your ideal Colorado Springs home.