When you decide to buy a house, you’re not only committing to paying for the purchase price of the home but also the interest rate on your mortgage loan – the cost of borrowing money from your mortgage lender.
While interest rates have fallen in recent months, many homebuyers are still seeking ways to make homebuying more affordable. And while it may be tempting to sit tight and hope that mortgage rates continue to drop, that’s not guaranteed to happen. That’s where mortgage rate buydowns come into play.
By paying a bit more upfront, you can ensure a lower mortgage rate and keep more money in your pocket each month.
What is a mortgage buydown?
A “mortgage buydown” is a financing agreement where the buyer, seller, or builder pays mortgage points, also known as discount points, at closing to obtain a lower interest rate. This one-time fee is paid at closing in exchange for a lower interest rate.
There are many ways to buy down a mortgage, depending on your lender and whether you want a permanent or temporary mortgage buydown rate.
Permanent vs. temporary buydowns
A mortgage buydown can take place over a set period of time or the duration of the loan.
Permanent mortgage buydown
With this option, you’ll buy a lower rate for the entirety of the loan term at closing from your lender through discount points. Unlike a temporary mortgage buydown, the rate will never increase.
Temporary mortgage buydown
With this arrangement, your mortgage interest rates will be reduced for a period of time before returning to the standard amount. You’ll see structures of temporary mortgage buydowns referred to as a “3-2-1 buydown” or a “2-1 buydown,” for example. We’ll cover what each arrangement looks like later.
How much does a mortgage buydown cost?
Each mortgage point a borrower pays usually equals 1% of the loan amount and typically reduces your interest rate by 0.25%. For example, one point would lower the mortgage rate from 6% to 5.75%….