A mortgage rate buy-down is a tactic homebuyers use to lower their mortgage interest rate by paying an additional amount at closing. This extra payment is then applied to reduce the interest rate for a specified period.
There are two primary types of buy-downs: temporary and permanent. A temporary buy-down involves paying a lump sum at closing to lower the interest rate for the initial few years of the loan. In contrast, a permanent buy-down requires a larger upfront payment to secure a lower interest rate for the entire life of the loan. This option can benefit buyers planning to stay in the home long-term, allowing them to save on interest over time.
A popular form of temporary buy-down is the "2-1 buy-down." In this case, the interest rate is reduced by 2% in the first year, 1% in the second year, and then reverts to the standard rate for the remainder of the loan. This structure can help borrowers qualify for a loan or manage early mortgage payments more easily.
The cost of a buy-down is typically calculated in points, where each point equals 1% of the loan amount. For instance, if a lender charges two points on a $100,000 loan, the buy-down would cost $2,000.
Mortgage rate buy-downs can be an attractive option for buyers looking to save on interest or for those expecting a future income increase and want to lock in a lower rate.
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