As mortgage interest rates creep up, many homebuyers are experiencing higher mortgage payments. For this reason, some borrowers are temporarily buying down their loan rates to reduce their payments for the first one to three years — allowing them to “ease” into a bigger payment.
Are you curious about how temporary buydowns work? Here’s what you need to know about this incentive.
What is a temporary mortgage buydown?
A temporary buydown is a mortgage option that allows homebuyers to pay a lower mortgage rate for the first one to three years of their loan term. Their permanent rate doesn’t kick in until the buydown period expires. This results in lower initial home loan payments. Temporary buydowns could make homeownership more accessible and affordable in the early years.
What does it mean to buydown your interest rate?
Buying down a mortgage interest rate involves paying an upfront fee to a mortgage lender in exchange for a lower rate. Temporary buydowns are incentives paid by home sellers or builders. When submitting an offer, you can ask the seller to temporarily buydown your rate. If they agree, they’ll pay the difference between the original rate and the reduced rate.
What are my buydown options?
Temporary mortgage buydowns aren’t one-size-fits-all. Different buydown options offered by FirstBank Mortgage include:
- 1/0 buydown: Rate reduced by 1% in the first year; the original rate starts in year two (eligible with conventional and USDA loans)
- 2/1 buydown: Rate reduced by 2% in the first year, 1% in the second year; the original rate starts in year three (eligible with conventional, VA and FHA loans)
- 3/2/1 buydown: Rate reduced by 3% in the first year, 2% in the second year and 1% in the third year; the original rate starts in year four (eligible with conventional and VA loans)
When should I consider a temporary buydown?
A temporary mortgage buydown isn’t the right choice for every homebuyer. Only consider this option if you’re confident in your ability to afford a higher mortgage payment once the buydown expires.
How do I request a temporary buydown?
If you’re interested in a temporary mortgage buydown, speak with a mortgage lender to discuss your options. FirstBank Mortgage offers multiple buydown solutions to reduce your rate and monthly payment. Keep in mind that you’ll need to ask the seller for a buydown when negotiating the home sale. Sellers and builders usually cover this cost.
How do I know if I’m qualified for a temporary buydown?
Different factors determine whether you’re eligible for a temporary mortgage buydown. Speak with a FirstBank Mortgage loan expert to discuss your options and financial situation. Factors like your income, debt-to-income ratio and credit score affect your eligibility for a mortgage and interest rate.
What happens after my temporary rate expires?
Once your temporary rate expires, your original mortgage rate goes into effect. This can occur in year two, three or four of the mortgage term. Since your mortgage rate will increase, your monthly payment will too.
What is the advantage of a temporary buydown?
One key benefit of a temporary buydown is the ability to get a lower monthly payment during the early years of your mortgage term. This might make it easier to qualify for a home loan, and it gives you time to adjust to higher costs.
Are there any disadvantages to a temporary buydown?
Temporary mortgage buydowns require an upfront fee, which is paid by home sellers or builders. Therefore, you’ll have to negotiate the buydown in your purchase offer. Your mortgage rate and payment will increase after the buydown expires, which could negatively affect your budget if you haven’t planned for the increase.
To learn more about temporary buydowns, or to start the mortgage pre-approval process, contact the local experts at FirstBank Mortgage.