Owning a home is the American dream and one of the biggest investments a person can make in his/her life. We are always looking for more ways to make buying more affordable, from shopping for the best mortgage rates to negotiating prices.
When it comes to finding the right mortgage program, lenders have different options available to help you have a manageable mortgage payment.
One of these programs to help buyers achieve homeownership is a temporary buydown.
Temporary Buydowns Help Reduce Mortgage Interest Payments
Temporary buydowns are designed to help reduce mortgage interest payments. The most common buydowns are a 2-1 or a 3-2-1. This means that the rate is “bought down” by either the seller or lender for the first two or three years, respectively.
If a buyer decides to use a temporary buydown to lower their mortgage interest, a buydown fee is required. This fee is paid upfront and put into an escrow account that subsidizes the loan for the first few years of its life. This deposit is what offsets the discounted interest.
Temporary buydowns are available on most loan programs, like conventional, FHA, and VA.
Temporary Buydowns Help Buyers Plan Their Budgets
Another benefit to a temporary buydown is that it can help buyers plan their budgets for the next two to three years. Their mortgage plan with a temporary buydown is more predictable than an adjustable rate mortgage (ARM).
Temporary Buydowns Shouldn’t Be Confused With Buying Points
Unlike buying mortgage discount points, where the interest rate is bought down for the life of the loan, temporary buydowns only lower the rate during the initial buydown period. They are also not lender credits, where you pay higher interest rates to offset closing costs.