What is a Buydown on a Mortgage?

Buying down the interest rate on a mortgage loan can be an effective way to save money and potentially get into your dream home faster. 

The savings from any buydown option will translate into lower monthly payments for you as a buyer, freeing up funds for you to use towards transforming your new house into your dream home, to put aside in a savings fund, or to help pay down your principal loan amount.  

Let’s take a detailed look at how buydowns work and address some common questions about them. 

How Does a Buydown Work? 

A mortgage buydown is a financing option that helps homebuyers reduce their monthly mortgage payments for the first few years of the loan term. Either the seller of an existing home or the builder of a new construction home pays upfront fees to help subsidize the monthly mortgage payments, representing a “buy down” or reduction in the interest rate on the loan. This results in lower monthly payments for the buyer, making the mortgage more affordable. 

What is a 2/1 Buydown? 

A 2/1 Buydown is one of several buydown options in which a seller or builder subsidizes the monthly mortgage payments for the first two years to represent a reduction in rate. In year one, the monthly payment is equal to an interest rate reduced by two percentage points. In year two, the reduction in monthly payment is equal to an interest rate that has been reduced by one percentage point. After this, the mortgage payments will reflect the original locked market rate of the mortgage. 

This particular type of buydown has been getting a lot of attention in our current market because it effectively locks in a lower rate for two years. During that time, it gradually steps up to the actual rate of the loan. 

Additional Mortgage Buydown Options 

Other popular options for mortgage buydowns include: 

• 1/1 Buydown: With a 1/1 buydown, the seller or builder subsidizes the monthly payments to represent a 1% reduction in rate for the first two years of the loan. 
• 1/0 Buydown: In this option, the monthly payments are subsidized to represent a 1% reduction in rate for the first year of the loan only. 

How Much Can I Save With a Mortgage Buydown? 

You can save a significant amount in your monthly mortgage payments over the buydown period. In the example below, with a $617,500 loan amount, the buyer would save $14,712 in their monthly mortgage payments over the two years of the buydown period.

You can then use those savings to put money aside, invest in your home, or put towards other financial priorities.

*Payment example: If you have a loan amount of $617,500 with a 30-year loan at a fixed rate of 5.5% (APR 5.547%), you would make 360 payments of $3,564. Payment stated does not include taxes and insurance, which will result in a higher payment.

How do Buydowns Help Homebuyers? 

A mortgage buydown can be a useful option for borrowers who expect their income to increase in the future, or who want to reduce their initial mortgage payments to help them manage other financial commitments.  

It is important to carefully consider the costs and benefits of a mortgage buydown, just like you would when comparing any other loan options. The upfront fee can be substantial and may not be worth it if it is not being covered by your seller or builder.  

Additionally, the reduced payments in the early years are usually temporary, so it is important to consider the long-term affordability of your mortgage. 

You’ll want to make sure to budget for the monthly payment based on the regular interest rate that goes into effect after the buydown period. 

A mortgage buydown can significantly reduce your monthly payments during your first few years of homeownership, freeing up additional funds for remodeling, furnishing projects around the house, or to put towards your savings. 

Get a free consultation from one of our FHM loan officers today to see if this is the right home financing option for you.