How much does it cost to temporarily buy down a mortgage interest rate?
Buying down a mortgage interest rate can make homeownership more affordable by helping lower your monthly mortgage payments at the start of your loan. This process, known as a mortgage temporary buydown, is a financing option where a builder, lender or seller pays a lump sum in exchange for a lower interest rate for a specified time.
How much does it cost to buy down an interest rate for a period of time? The cost to temporarily buy down the interest rate is fairly simple. If you’ve elected for a 1-year temporary buydown, the interest rate for the first year would be 1 percent lower than the note rate. To calculate the cost, you would take the principal and interest payment at the note rate minus the principal and interest payment 1 percent lower and then multiply that by 12 months. The exact cost will depend on several factors, including the size of the loan, the current interest rate and the length of the buydown period.
Types of buydown mortgages
There are two common mortgage buydowns: temporary buydowns and permanent buydowns. Temporary buydowns offer a lower interest rate for a set period, after which the interest rate adjusts to the note rate. Permanent buydowns, such as discount points, offer a lower interest rate for the life of the loan.
A lower interest rate with a temporary buydown can mean a more affordable initial monthly mortgage payment while you get settled in your new home. Temporary buydowns offer a reduced rate on a home loan for one, two or three years in exchange for a cash deposit from a builder, lender or seller.*
Mortgages with buydown plans have lower initial payments, a temporarily reduced interest rate and no balloon payments at the end of your loan term. In addition, the structure of the buydown will determine your payment increases, making them predictable throughout the life of your loan. We offer these options to help you get settled at the start of your loan.
- A 1-year buydown brings your rate down for the first year. Also known as a 1-0 buydown because your interest rate is reduced by 1 percent for the first year of your mortgage and then returns to the original rate.
- A 2-year buydown brings your rate down for the first two years. 2-1 buydowns reduce your interest rate by 2 percent for the first year and 1 percent for the second year. In year three, the interest rate returns to the original rate for the remaining mortgage term.
- A 3-year buydown brings your rate down for the first three years. A 3-2-1 buydown reduces your interest rate by 3 percent for the first year, 2 percent for the second year and 1 percent for the third year. In year four, the interest rate returns to the original rate for the remaining mortgage term.
Payment Advantage: Reduce your rate by 1 percent for the first year on us. Our Payment Advantage program allows you to lock in a Conventional loan, and we’ll pay 1 percent of your interest rate for one year with a lender-paid temporary buydown. After the first year, you’ll have a predictable payment increase and may be eligible to refinance through programs such as the Payment Protection program, which has no lender fees. For Payment Protection program full terms and conditions, visit www.guildmortgage.com/homebuyer-protection. Conventional financing options for first-time and repeat buyers include primary purchase transactions with as little as 3 percent down and credit scores as low as 620.
Payment Advantage Plus: With Payment Advantage Plus, a 2-for-1 buydown program, eligible homebuyers can save even more. Payment Advantage Plus lowers your monthly payment for the first two years. When using a seller credit, your interest rate is 2 percent lower for the first year. Then we’ll pay to lower the interest rate by 1 percent for the second year.
With our Payment Advantage programs, qualified borrowers can save even more by refinancing later with our Payment Protection program.
Discount points are optional one-time fees paid at closing in exchange for a lower interest rate. Also known as mortgage points, the more points paid, the lower the mortgage interest rate. Each discount point is equal to 1 percent of your total loan amount. You can typically pay up to three points, depending on how much you want to lower your rates. Because they don’t expire and permanently reduce your interest rate, they’re known as a permanent buydown.
How do you decide whether or not to pay points, and how many? That depends on several factors, such as how much money you have for a down payment and how long you plan to stay in your home. Points reduce the interest rate, an advantage if you plan to stay in your home for a while. But if you need the lowest possible closing costs, you can consider choosing your loan program’s lowest possible point option.
Five common limits to consider on temporary buydowns
Keep these common limits in mind when considering a temporary buydown:
- Primary purchase: The option to buy down a mortgage rate may only be available for purchasing a home intended to be your main residence. Borrowers purchasing a vacation home or investment property may not be eligible.
- Credit score: The credit score will be based on the first mortgage lien selected, whether Conventional or government financing.
- Loan type: Temporary buydowns are offered on all types of financing, including Conventional, FHA, VA, USDA and Jumbo** options. It’s best to connect with a loan officer to discuss what type of mortgage fits your needs.
- Buydown period: Some temporary buydowns have a maximum buy down period of the first three years of the loan term. After this period, your payments will be at the note rate.
- Buydown amount: The maximum cost to buy down an interest rate may be limited by the lender’s policies and local and federal regulations.
Can buying down an interest rate save money?
Buydowns can be a great way to save money on your mortgage and make homeownership more affordable. Mortgages with temporary buydown options have lower initial payments, a temporarily reduced interest rate and potentially lower closing costs.
The structure of the buydown will determine your payment increases, making them predictable throughout the life of your loan. Additionally, if you plan on staying in your home for a long time, permanently buying down the interest rate can help you save thousands of dollars over the life of your loan.
Steps to getting a buydown mortgage
Before you start home hunting, it’s important to consider how much it costs to buy down an interest rate so you can decide whether this option is right for you. We’re here to help. Connect with a loan officer at your local branch to learn more.
*Borrower-paid options are only eligible on a 1-year conventional temporary buydowns. **Jumbo temporary buydowns are only offered as seller or lender paid up to 2 years. Borrower must meet program eligibility and qualify based on the note rate of the program selected. The Payment Advantage and Payment Advantage Plus programs are a promotional offer from 11/10/2022 to 7/31/2023. The Payment Advantage program is a promotional primary purchase offer on a Conventional 1-year lender-paid temporary buydown. The Payment Advantage Plus program requires seller participation to provide a seller incentive to temporarily reduce the rate by 2% for the first year. The lender promotional offer will temporarily reduce the rate by 1% for either the first or second year of the conventional mortgage on conforming and high balance loan limits. The lender and seller-paid credit will fund the buydown escrow account, and the funds will be dispersed out of the buydown escrow account during the first 12 or 24 months of the loan.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.