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Rate Buydown Guide
Understanding Mortgage Rate Buy Downs:
Hello everyone! I am Heath Riddle from the Heath Riddle Lending Team, and today I want to talk about a tool that can make buying a home easier and more affordable: Mortgage rate buy-downs.
What is a Mortgage Rate Buy Down?
A mortgage rate buy down is a strategy used by home buyers to lower the interest rate on their mortgage. By paying what's called "discount points" at closing, you can secure a lower interest rate. This can be funded by the buyer or even by the seller through seller-paid closing costs or credits.
Different Types of Buy Downs:
Mortgage rate buydowns come in two types: temporary and permanent. Both can be used with most loan types, including conventional loans, FHA loans, VA loans, and USDA loans.
Temporary Buy Down:
A temporary buy-down is when a lump sum is paid to reduce the interest rate temporarily for the early years of the loan. Two examples are the 2-1 and 3-2-1 buy downs, which lower your interest rate for the first two or three years of your mortgage, respectively. However, keep in mind that you must qualify at the highest rate based on the current market, and you might need to refinance in the future.
Permanent Buy Down:
A permanent buydown, on the other hand, reduces your interest rate for the entire lifespan of the loan. This gives you a fixed, lower rate and potentially allows you to qualify for a larger loan due to a lower monthly payment. Even though this might prompt a refinance if rates improve, it's worth considering given the stability it provides.
Weighing the Pros and Cons:
Both types of buy-downs have their benefits and drawbacks. With a temporary buydown, you can get a lower rate for the first few years, and any unused funds can be applied towards a principal reduction on a refinance. However, it's important to maintain your financial stability so that you can refinance when needed.
With a permanent buydown, you get a fixed rate for 30 years, which can provide peace of mind. However, you might still want to refinance if rates drop in the future.
Making the Most of Buy Downs in Today's Market:
In the current market, these buy-downs can be a powerful tool. They can give you negotiating power with sellers and help you afford the house you love. So, I encourage you to consider these options and reach out to me if you have any questions. Thank you for reading, and I look forward to helping you with your home-buying journey!
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