Temporary Buydowns lower a homebuyer’s mortgage rate for the first 2 years of the loan. However, temporary buydowns differ from Adjustable Rate Mortgages (“ARMs”) and have more security.
What Is A Temporary Buydown
A Temporary buydowns lower a homebuyer’s mortgage interest rate temporarily. Most commonly, temporary buydowns lower the interest rate for the first 2 OR 3 years of the loan. Therefore, the buyer’s mortgage payment is reduced during the first 2 OR 3 years.
For example, a “2-1 buydown” reduces the buyer’s mortgage rate by 2% in year 1 and 1% in year 2. In year 3 and beyond the borrower pays the full rate on their mortgage. Finally, the interest rate does not increase after year 3. For example, a 2-1 buydown with a full rate of 6.5% would look like this:
- Year 1 Rate: 4.5%
- Year 2 Rate: 5.5%
- Year 3 and beyond: 6.5%
How Much Do Temporary Buydowns Cost?
Temporary Buydowns cost the buyer nothing. In fact, buyers cannot pay for them. Typically, sellers pay for the buydown fee. This is all negotiated upfront between a buyer and seller.
What Type Of Market Do Temporary Buydowns Work in?
A Temporary Buydown works best in specific situations. Typically, buyers have better success in a market with high inventory and high mortgage rates.