You may have heard the term ‘buydown’ tossed around lately in real estate and mortgage circles and wonder what exactly it means. To explain I’ll take a quick step back. It’s been a seller’s market for a long time but when the mortgage interest rates rose drastically in the summer and fall, it caused buyer demand to drop because the payments were simply no longer affordable.
To assist buyers with the high interest rates, some banks began offering a new program called a buydown, or a 2:1 buydown. In a 2:1 buydown for example, the seller of a home contributes a concession to the buyers lender at closing, which allows them to ‘buy down’ the interest rate. So if the current interest rate that the buyer is approved for is 6%, and the seller is willing to contribute to the buydown (which can be a few thousand dollars), then for the first year of the mortgage you would pay 4% , year two you would pay 5%, and then year three and beyond it goes up to the full 6% interest rate.
This break in interest on the front end of your mortgage is a great way to get into a home with lower monthly payments. Plus, in the future if interest rates drop lower and you qualify, you could refinance. The 2:1 buydown program is already becoming popular and some sellers are offering it to buyers as incentive to help sell the home.
The buydown is another great tool for lenders and real estate agents to help get their buyers into homes. However, not every lender, bank or institution offers this program. Ask your real estate agent if their preferred lenders offer the program, and if you’re working with a mortgage lender already they can guide you.
For questions on the buydown loan program or anything real estate, please reach out!