Mortgage Buydown – What Is It and How Does It Work?

A mortgage buydown is when a borrower pays extra money to temporarily reduce their interest rate and monthly payment. This can be done by paying discount points upfront or by making an agreement with the seller or builder to cover the costs. Mortgage buydowns are most beneficial when used to lower the interest rate for the first few years of the loan, as this is when borrowers typically have the highest monthly payments.

There are three main types of mortgage buydowns: 1-0, 2-1, and 3-2-1.?

1-0 Buydowns

With a 1-0 buydown, the borrower pays one point upfront to lower their interest rate by 0.25% for the first year of the loan. For example, if a borrower has a 30-year loan at 5%, a 1-0 buydown would lower their interest rate to 4.75% for the first year.?

2-1 Buydowns

With a 2-1 buydown, the borrower pays two points upfront to lower their interest rate by 0.50% for the first year and 0.25% for the second year. For example, if a borrower has a 30-year loan at 5%, a 2-1 buydown would lower their interest rate to 4.5% for the first year and 4.75% for the second year.?

3-2-1 Buydowns?

With a 3-2-1 buydown, the borrower pays three points upfront to lower their interest rate by 0.75% for the first year, 0.50% for the second year, and 0.25% for the third year. For example, if a borrower has a 30-year loan at 5%, a 3=2=1 buydown would lower their interest rate to 4.25% for the first year, 4.5% for the second year, and 4.75% for third year.?

Mortgage buydowns can be a great way to reduce your monthly payments and interest rate, especially in those crucial early years of your loan when you may be struggling to make ends meet. If you're thinking about utilizing a mortgage buydown program, be sure to speak with your lender about which option makes the most sense for you and your financial situation.