Looking to ease the burden of your monthly mortgage payments and save up to 3% on your interest rate in the first year? Temporary mortgage interest buydowns might be the key to achieving this financial flexibility. Whether you're anticipating an income boost in the near future or simply want to make the transition from renting to homeownership smoother, temporary buydowns offer a strategic solution. In this article, we'll delve into the mechanics of temporary buydowns, explore various buydown options, and discover how both buyers and sellers can benefit from this innovative mortgage strategy.

What is a mortgage temporary buydown?

Temporary mortgage interest buydowns are a way to get more flexibility with a lower monthly mortgage payment for up to three years. In fact, year one monthly savings could be as high as $350 per month. A homebuyer will pay interest up front, either by or getting the lender or seller to pay for the buydown. This could reduce the mortgage interest rate up to 3% in the first year.

How do mortgage buydowns work?

There are several types of temporary buydowns that can be used depending on the lender.

• 3-2-1 buydown: A buydown of 3% in the first year, 2% in the second year, 1% in the third year, then back to the original locked rate in the fourth year for the duration of the term.
• 2-1 buydown: A buydown of 2% in the first year and 1% in the second year, then back to the original locked rate in the third year for the duration of the term.
• 1-1 buydown: A buydown of 1% in the first two years, then back to the original locked rate in the third year for the duration of the term.
• 1-0 buydown: A buydown of 1% in the first year, then back to the original locked rate in the second year for the duration of the term.

What are the benefits of a mortgage interest buydown?

While this does not increase purchase power and the price of the home you are purchasing, as discount points do, it does reduce your monthly payment for up to 3 years, sometimes substantially. This is a perfect solution if you are expecting an income increase in the next few years or just want to take advantage of seller concessions for a temporarily lower rate. If you are a renter, this might be the easier transition from rent payment to mortgage payment. It could also buy some time while you wait for rates to hopefully decrease for refinance.

How does the seller benefit?

These temporary buydowns are a great way for a seller to entice a prospective buyer to sign on the dotted line. Instead of a price decrease, the seller can get a full price offer and use what might have been a decrease toward a temporary buy down for the buyer.

Mortgage buydowns vs. mortgage discount points

Using discount points will permanently reduce the rate and is more costly, typically. Sellers can pay for those as well; however, there are differences:

• The return on investment of the discount points could take years. The average time for return on investment might be 3-6 years on a 30 year mortgage. However, the accumulated savings over the mortgage time frame well exceeds the upfront cost and your purchase power can increase.
• A temporary buydown will not increase purchase power as you still have to use the normal rate for debt ratio.