Interest Rate Buydowns: A Smart Way to Save on Your Mortgage
In today’s housing market, many homebuyers are turning to a financing strategy known as an interest rate buydown to make mortgages more affordable—especially in high-rate environments. But what exactly is a buydown, and how does it work?
An interest rate buydown is when a borrower—or sometimes the home seller or builder—pays an upfront fee to temporarily or permanently reduce the mortgage interest rate. This lowers monthly payments, especially in the early years of the loan. In today’s real estate market, the sellers are giving “concessions” to the buyer that can be used to buydown the rate. So you’re getting a lower interest rate for the first few years, at no cost to you.
There are two common types of buydowns:
Temporary Buydowns (e.g., 2-1 Buydown): The interest rate is reduced for the first one or two years. For example, with a 2-1 buydown, the rate is 2% lower in the first year and 1% lower in the second year before reverting to the full rate for the remainder of the loan term.
Permanent Buydowns: The interest rate is reduced for the entire life of the loan by paying discount points—essentially prepaid interest.
Why consider a buydown? For buyers, it significantly eases the initial financial burden of home ownership, helping you qualify for a loan or adjust to new home expenses. For sellers, offering to cover the cost of a buydown can make a property more attractive.
Buydowns don’t come free—they require upfront cash from the buyer, or seller concessions. But used wisely, they can be a valuable tool in managing long-term affordability and improving purchasing power.
If the current interest rate environment is preventing you from taking the step to home ownership, reach out to discuss if a rate buydown may be the right way to lower the cost of your monthly mortgage payment.