Interest Rate Buydowns
An interest-rate buydown is a financial tool that helps you qualify for a larger loan and purchase a higher-priced house than you might otherwise afford. By paying extra (tax-deductible) points upfront, you can secure a lower interest rate for the initial years of the loan. This is particularly common among people relocating for work, as employers sometimes cover the cost of these points as part of a relocation package.
Typically, buydowns are achieved by paying additional points upfront. However, many mortgage companies now offset this cost by increasing the note rate in later years.
The most common is the 2-1 buydown, which can cost 3 additional points above current market points. During the first year of the mortgage, the interest rate is reduced by 2 percent and 1 percent the second year. So if you get a 7 percent interest rate on a 30-year fixed 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 buydown. This reduces the mortgage rate 3 percent the first year, 2 percent the second and 1 percent the third. Thereafter you pay the full rate.
Some programs are “flex-fixed” buydowns that increase interest at six-month intervals instead of annually.