Interest Rate Buydowns

With interest rates hovering above 7%, we are seeing an increase in Interest Rate Buydowns. Today, I am going to walk you through two ways to get a lower Interest Rate when you purchase a home!

#1. The 2-1 Buydown

A 2-1 Buydown is a great way to get a lower rate for the first two years that you own a home (and possibly refinance later). Here’s how it works:

• In the first year, your rate is 2% lower than the rate of your note.

• In the second year, your rate is 1% lower than the rate of your note.

• In years 3-30, your rate is the true rate of your note.

My friend Michelle Ham, with Churchill Mortgage, put these numbers together to show what a 2-1 Buydown would look like in practice.

• Purchase Price: $600,000

  • Down Payment: $100,000

  • Note Interest Rate: 6.874%

  • Term (years): 30

• Monthly Mortgage Payments

  • Year 1 Effective Rate of 4.875% = $2,646.04

  • Year 2 Effective Rate of 5.875% = $2,957.69

  • Years 3-30 Effective Rate of 6.874% = $3,284.64

In the first year alone, one you’d save $7,663.24. In the second year, you’d save $3,923.46. The hope is that by year three, Interest Rates will have gone down and, you are able to refinance to have a lower Note Interest Rate.

How does this work? In the above example, $11,586.70 is required to be deposited in Escrow at closing. This covers the difference between your Note Interest Rate and the Buydown Rate. We are mostly seeing sellers cover the cost of buydowns and sometimes your real estate agent will chip in part of their commission too!

This is the perfect option for buyers who are ready to go but need a lower monthly payment than current interest rates allow. If you know a raise or promotion is coming your way in the next few years, the peace of mind that a 2-1 Buydown offers is a difference-maker.

#2. Discount Points

Another option buyers have is to permanently lower their interest rate by purchasing Discount Points at closing.

• Discount Points are a one-time, upfront fee.

• A Discount Point is defined as 0.25% or 25 basis points.

• Each “point” costs 1 percent of the mortgage. For example, one point on a $200,000 mortgage would cost $2,000.

• Each point lowers the rate by 0.25%. Therefore, one point would lower a mortgage rate from 6.00% to 5.75% for the life of the loan.

If you can afford the money upfront, buying mortgage points may be a very smart investment. We can also negotiate and ask sellers to purchase Discount Points for you!

If you are curious about getting a lower interest rate and want to learn more? Reach out today, and let’s get a coffee or hop on a call!