How Does it work?
An interest rate buydown allows borrowers to receive a reduction in their original payment for an introductory period in exchange for an up-front cash payment. The payment is reflected as a fee that is paid at closing, which is paid either by the borrower or an interested party such as a builder, seller, real estate agent, etc.
In a 2-1 buydown, if the note rate is 6% the rate for the first year is reduced by 2%, and by 1% for the second year to continue with the note rate for the remainder of the term, then the rate for the first year would be 4%, the rate for the second year would be 5% and the rate for year 3 to year 30 would be the original note rate of 6%.
The lump sum due for the buydown (Buydown Fee) would be the difference in payment over the term of the buydown. For example, if the monthly payment at the note rate of 6% is $3,500.00 and you bought down the rate to get a $3,000.00 per month payment for the first year (at 4%), and $3,200.00 per month payment for the second year (at 5%) the buydown funds would equal to $6,000 .00 for the first year ($500 for the first 12 months) and $3,600.00 for the second year (300.00 for the second 12 months) with a total of $9,600.00 buydown Fee.
Why choose a temporary interest
buydown in the firs place?
The primary reason one might choose a buydown is to free up cash flow at the beginning of their mortgage term. For example, purchasing a home will likely require added expenditures such as furnishings, minor repairs, or landscaping costs. Having a lower monthly mortgage payment through a temporary interest rate buydown can provide extra cash for those upfront homeowner expenses.
Keep in mind that temporary interest rate buydowns are an entirely optional part of the mortgage loan.
This means that the lender cannot elect to add this feature to the mortgage unless the borrower specifically requests it.