Reduce Your Payment on a New Loan with an Interest Rate Buydown

With this strategy, either you, the seller or the builder may pay a higher amount up front in exchange for a temporarily lowered interest rate on your loan. Curious to learn more? Read on, and then reach out to one of our mortgage experts to have your questions answered.

There are two types of buydowns: permanent and temporary. It is important to understand the difference between the two before deciding if it is worth the extra expense.

Permanent vs. Temporary Buydowns

Permanent Buydowns: Permanent buydowns are the same as buying mortgage discount points. Mortgage points are the fees a borrower pays a mortgage lender in order to trim the interest rate on the loan, thus lowering the overall amount of interest they pay over the mortgage term. This practice is sometimes called “buying down the rate.” You pay additional costs, and the mortgage lender lowers the interest rate. One percentage point is $1,000 per $100,000 of the mortgaged amount and lowers the interest rate for the life of the loan.

Temporary Buydowns: Temporary buydowns lower the payment as if the interest rate was lower for the first one to three years In multi-year buydowns, the payment increases by 1% each year until it returns to the original closing payment amount.

Is a temporary buydown right for you?

That can depend on your financial situation and plans for the next several years. It may help to discuss your circumstances with a loan specialist to determine your best course of action.

Key Features of Temporary Buydowns:

Time Frame: Temporary buydowns are commonly structured for one to three years.

How It Works: The seller, builder, or lender may contribute to the subsidy cost needed to cover the difference between the full and discounted mortgage payment during the first one to three years of your mortgage. This translates to a temporary discount on your repayment amount, which may be one to three points depending on the terms of the buydown.

How to Pay: Depending on your loan type, you can pay cash, ask the seller to pay, roll into your mortgage, use a builder closing cost incentive, or use gift funds. It is important to speak with your lender to explore all your options as some restrictions may apply.

How Temporary Buydowns Are Structured

Temporary Buydowns are typically referred to with a series of numbers that indicate their structure and term.

• 1-0 Buydown: The payment is lowered as if the interest rate was lowered by 1 percentage point for the first year of the loan.
• 2-1 Buydown: The payment is lowered as if the interest rate was lowered by 2 percentage points for the first year of the loan, then 1 percentage point for the second year.
• 3-2-1 Buydown: The payment is lowered as if the interest rate was lowered by 3 percentage points for the first year of the loan, 2 percentage points for the second year, and 1 percentage point for the third.

 Regardless of the structure, the payment returns to its original note rate when the buydown term ends.

Advantages of a Temporary Mortgage Buydwon

Depending on your financial circumstances and goals, a temporary buydown could benefit you. By decreasing initial monthly payments, homebuyers may experience less strain on their budget during the first few years of homeownership.

1. Lower Initial Monthly Payments
   A temporarily reduced interest rate means lower payments at the beginning of the mortgage, freeing resources for other home-related expenses, such as maintenance or renovations.
2. Opportunity to Build Savings
   With smaller payment obligations in the early years, borrowers may have more flexibility to save, invest, or plan for future financial goals.
3. Seller or Builder Incentives
   In some cases, the seller or builder contributes to the buydown cost as an incentive to close a deal. This can eliminate or lessen the financial burden for the borrower.

Common Temporary Buydown Structures

1-0 Buydown

With a 1-0 buydown, your payment is reduced for the first year in an amount representing a rate that is 1% lower than your contract note rate. Here's what that looks like for a 30-year fixed with a $350,000 loan amount at a contract note rate of 7.375% (7.503% APR) interest.

Review the chart below to see how this buydown would affect a buyer’s monthly mortgage payments.

A temporary buydown reduces the monthly payment as if the initial rate was 1% lower in the first year. The payment returns to the repayment amount under the note after buydown period. For example, a 1-0 buydown Conventional 30-year fixed rate loan with a purchase price of $350,000, down payment of 20%, and an annual percentage rate of 7.503% would result in a payment of $2,184 (which is that same as an interest rate of 6.375% (6.495% APR)) for the first year, and the payment will be $2,417 after the first year (which is the normal monthly payment at 7.375% (7.503%APR)) at cost of 0 points paid at closing. The monthly payment of $2,417 for the second year will continue for the life of the loan thereafter. Payments do not include amounts for taxes and insurance premiums, and the actual payment obligation will be greater.

2-1 Buydown

In the 2-1 buydown, your payment is reduced for the first year in an amount representing a rate that is 2% lower than your contract note rate. In the second year, your payment is reduced to an amount representing a rate that is 1% lower than your contract note rate. Then, in the third year, the payment returns to the full payment amount which will be the same for the rest of the loan term.

Review the chart below to see how this buydown would affect a buyer’s monthly mortgage payments.

 A temporary buydown reduces the monthly payment as if the initial rate was 2% lower in the first year and 1% lower in the second year. The payment returns to the repayment amount under the note after buydown period. For example, a 2-1 buydown Conventional 30-year fixed rate loan with a purchase price of $350,000, down payment of 20%, and an annual percentage rate of 7.503% would result in a payment of $1,960 (which is that same as an interest rate of 5.375% (5.488% APR)) for the first year,  a payment of $2,184 for the second year (which is the same as an interest rate of 6.375% (6.495% APR)), and $2,417 for the third year (which is the normal monthly payment at 7.375% (7.503% APR)) at cost of 0 points paid at closing.  The monthly P&I payment of $2,417 for the third year will continue for the life of the loan thereafter. Payments do not include amounts for taxes and insurance premiums, and the actual payment obligation will be greater.

3-2-1 Buydowns

A 3-2-1 buydown is a temporary payment reduction where your payment starts low and increases incrementally for the first three years. In the first year, your payment is reduced to an amount representing a rate that is 3% lower than your contract note rate. In the second year, your payment is reduced to an amount representing a rate that is 2% lower than your contract note rate. In the third year, your payment is reduced to an amount representing a rate that is 1% lower than your contract note rate. Then, in the fourth year, the payment rate returns to the full payment amount and will stay the same for the remainder of the loan term. 

Review the chart below to see how this buydown would affect a buyer’s monthly mortgage payments.

 A temporary buydown reduces the monthly payment as if the initial rate was 3% lower in the first year, 2% lower in the second year and 1% lower in the third year. The payment returns to the repayment amount under the note after buydown period. For example, a 3-2-1 buydown Conventional 30-year fixed rate loan with a purchase price of $350,000, down payment of 20%, and an annual percentage rate of 7.503% would result in a payment of $1,747 (which is the same as an interest rate of 4.375% (4.482% APR)) for the first year,  a payment of $1,960 for the second year (which is the same as an interest rate of 5.375% (5.488% APR)), a payment of $2,184 for the third year (which is the same as an interest rate of 6.375% (6.495% APR)), and a payment of $2,417 for the fourth year (which is the normal monthly payment at 7.375% (7.503% APR)) at cost of 0 points paid at closing. The monthly payment of $2,417 for the fourth year will continue for the life of the loan thereafter. Payments do not include amounts for taxes and insurance premiums, and the actual payment obligation will be greater.

Newrez Knows Buydowns

A mortgage buydown can be a useful strategy for homebuyers in a changing interest rate environment – but be sure to consult a lender, as some restrictions apply. Buydowns are only eligible when purchasing primary residences and second homes.

Newrez offers over 123 Temporary Buydown Mortgage options across a wide variety of product suites, including Fannie Mae®, Freddie Mac®, FHA, VA, USDA, and our Smart Series programs that will cover homebuyers' unique needs. 

Interested in exploring money-saving options with your mortgage? Contact us today!

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This communication does not constitute a commitment to lend or the guarantee of a specified interest rate. Loans secured by a lien against your property. Application required and subject to underwriting approval. Not all applicants will be approved. Interest rate subject to change due to market conditions. If you do not lock in a rate when you apply, your rate at closing may differ from the rate in effect when you applied. Upfront mortgage insurance premium may be rolled into new loan amount. Important information relating specifically to your loan will be contained in the loan documents, which alone will establish your rights and obligations under the loan plan. Fees and charges apply and may vary by product and jurisdiction. Call for details. Terms, conditions, and restrictions apply.