Purchasing a house is a major investment requiring upfront funds, as well as the ability to cover the monthly mortgage, utility costs, taxes and more. But what if there were a way to get into the home of your dreams with a lower monthly payment for the first few years of ownership? An option known as a temporary interest-rate buydown may be worth exploring.

A temporary buydown involves exchanging a cash deposit at closing for reduced interest rates in the first few years of the loan. The rates then gradually increase and eventually resume to the pre-discounted rate in your contract.

Let’s take, for example, a 2-1 buydown on a $400,000 house with a 30-year, 6.5% fixed interest rate. In the first year, the principal and interest payment will be based on a rate of 4.5%, 2% lower than the standard, saving you $501 on your monthly payment. In the second year, you will save $257 on your monthly payment with a 5.5% interest rate. Finally, in the third year, the interest rate returns to its fixed 6.5%.

The buydown fee, or subsidy, may be funded by the buyer, seller, lender, buyer’s employer, family members or other interested parties. It is placed in an escrow account upon deposit. Every month the temporary buydown is in effect, the difference in interest between the permanent rate and your discounted rate is transferred from the escrow deposit to satisfy the total interest due that month on the loan. Buydowns can often be added to several loan programs, including conventional, VA and FHA.

Seller Benefits

A motivated seller may consider offering a credit, which can be used to subsidize a temporary buydown in order to incentivize buyers to purchase the property. The savings could be enough to influence those who had not previously considered buying.

Buyer Benefits

Jumping into a hefty mortgage payment can be overwhelming. With a temporary buydown, you can ease into the payments over time. This is ideal for those who expect to see a rise in income in the next few years. Homeowners using a temporary buydown not only save on monthly mortgage payments, but also interest over the first few years of the loan. Saving on interest rates for the term of the buydown also means you can put more toward home improvements, furnishing the house, upgrading the backyard and more.

Types of Temporary Buydowns

There are several common temporary buydown offers, including a 3-2-1, 2-1 and 1-0. In a 3-2-1 buydown, the mortgage payment is 3%, 2% and 1% lower than the permanent rate in the first three years of the loan, respectively. As shown in the example above, a 2-1 buydown offers a 2% and 1% discounted rate for the first two years of the loan, respectively. In a 1-0 term, rates are 1% lower for the first year of the loan. The type of temporary buydown you select is dependent on your goals for the next few years.

Temporary buydowns offer interest rate savings at the beginning of a home loan, which can benefit the buyer and seller alike. But are they right for you? Call us at 888-LOAN-391 to discuss your options and find the best fit for your needs.