Interest Rate Buy-Downs

Buying

So,what is an interest-rate buy-down?  Do you have any idea?  Let's talk about it...

 

Buying down the interest rate can enable you to qualify for a larger mortgage loan, lower your monthly payments, and possibly purchase a higher-priced home.

A buy-down allows you to pay extra "points" up front in return for a lower interest rate.  These points are calculated by a percentage, usually 1% to 3% of the amount of the loan.

The good news concerning these points is that they are tax deductible.

Sometimes in a job relocation,  the buyer's employer will pay the extra points as part of the relocation package.

Buy-Downs are a financing technique used to reduce the monthly payment for the borrower.

Under some buy-down plans, a residential developer, builder or the seller will make subsidy payments in the form of points to the lender that "buy down" (or lower) the effective interest rate paid by the homebuyer.

State agencies oftentimes offer lower rate loans, but to qualify borrowers usually must be a first-time homebuyer and meet income limits based on the median income level of their specific county.

While the most common way of obtaining a buy-down is by paying these extra points up front, many mortgage companies now increase the note rate to cover the cost in later years.

Let's talk about the different ways this can work.  Are there different types of buy-downs?  You bet!

The most common is the 2-1 buy-down, which often costs 3 additional points above the current market points.  It works like this: In the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you secure a 7 percent interest rate on a 30-year fixed-rate mortgage, you’d pay 5 percent the first year, 6 percent the second year, and 7 percent for the remaining life of the loan.

Another option is the 3-2-1 buy-down. This reduces the mortgage rate 3 percent the first year, 2 percent the second year, and 1 percent the third year. Each subsequent year you pay the full rate.

Some programs are “flex-fixed” buy-downs that increase interest at six-month intervals instead of once each year. For example, a flex-fixed jumbo buy-down might cost you 1.5 points. The first six months, your rate would be 4.5 percent, the next six months would be 5 percent, the next 5.5, then 6 percent for the remainder of the loan term.

Right now as rates are slowly creeping up, we may start seeing buyers choosing buy-downs to help with their home purchase.