Mortgage Rate Buydowns to the Rescue

November 21, 2022

People on the fence about buying a home right now because of rising mortgage interest rates might need to consider adding a tool to their homebuying arsenal — the mortgage rate buydown.

Much like the name implies, this tactic helps you reduce the interest rate on your mortgage. Buyers have a choice between a temporary buydown or a loan that reduces your interest rate the entire duration of your loan. There are fees associated with each — unless you’re buying a new home from a Cross Creek Ranch builder offering a rate buydown incentive (more on that later).

If you want to lower your interest rate permanently, you can pay discount points at closing. Typically, a discount point cuts your interest rate by .25 percent — the more discount points you pay, the lower your interest rate. Each point costs 1 percent of your loan amount, so going this route would require you to have more cash on hand at closing. If you intend to stay in your new home for only a couple of years, this might not be the solution for you as you likely wouldn’t recoup those additional closing costs in mortgage interest savings.

Other types of buydowns reduce your interest rate for up to three years. The 1-0 buydown cuts your interest rate by 1 percent for the first year of your loan before reverting to the market rate for the loan’s remaining years. On a $400,000 loan and a 7 percent market rate, this could save you $263 a month or $3,156 annually.

The popular 2-1 buydown chops the first-year interest rate by 2 percent. The rate rises by 1 percent the following year and then increases to the market rate at the time of the loan in Year 3. Based on the $400,000 loan and 7 percent market rate example, this would result in a monthly savings of $526 the first year and $263 the second year or a total savings of nearly $9,500.

Less common is the 3-2-1 buydown, which reduces the interest rate by 3 percentage points the first year, 2 points the second year and 1 percent the third year of the loan before reverting to the original market rate. With our $400,000 example, your monthly mortgage payment savings the first year would be $789, following by a monthly savings of $526 the second year and $263 the third year for a total savings of more than $12,600 in interest.

These days, buyers are considering the temporary buydowns in hopes that interest rates will fall during the first couple years of their mortgage so they can then refinance at a lower market rate.

Like a permanent buydown, these temporary plans do add to your closing costs, which can affect your decision. However, some Cross Creek Ranch builders are offering to pay the associated costs for a temporary buydown. Tri Pointe Homes has a limited-time “How About Now” incentive that reduces your interest rate by 2 percentage points the first year and 1 point thereafter. Highland Homes is offering $20,000 that can be used to buydown your rate, cut closing costs or buy out your mortgage insurance. Builder sales representatives for each would have more details.