What’s a Buydown? A buydown mortgage allows for a lower interest rate in exchange for paying a fee, either upfront or rolled into the loan.
This is very much like paying “points,” except that it is usually the seller or builder who pays the fee as an incentive to make the sale. Of course, they are not doing this out of the kindness of the hearts. Typically, the cost of the buydown is simply recouped by adjusting the sales price of the home, which means you are effectively financing a larger amount. In essence, you are paying for the buydown in the form of a higher loan amount, and by extension, a higher mortgage payment. Because the seller will try to factor the cost of the buydown into the sales price, it is also important to make sure the home appraises for what it should. Inflated appraisals was a real problem during the housing bubble, as builders offered incentives to buyers in the form of buydowns.
Types of Buydowns
Buydowns come in two varieties: temporary and permanent. With a temporary buydown you get a lower interest rate for the first ‘X’ years of the loan, after which point, the rate increases. One of the more popular types of temporary buydowns is the “3-2-1.” For example, take a 30-year loan with a 7-percent rate.