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  • Writer's pictureJosh Taylor

Ease into your new payment with a temporary buydown

Updated: Jan 10

A temporary interest rate buydown is a loan program that gives you a temporary reduction in payment for the first couple of years of your loan. Unlike an adjustable rate mortgage, a temporary buydown is a fixed rate mortgage — your payment change at a predetermined, set schedule.

Understanding Rate Reduce

Rate Reduce is a temporary buydown program that operates by reducing the interest rate on your mortgage for the first few years. This reduction is made possible by the seller or builder, who contributes to your loan, effectively lowering the rate during the specified initial period. This generous gesture is categorized as a seller's concession, providing homebuyers with a financial breather in the early stages of their homeownership journey.

Exploring the Five Types of Temporary Buydowns

Under the umbrella of Rate Reduce, there are five distinct types of temporary buydowns, each with its own numerical representation:

3-2-1 Buydown

2-1 Buydown

1-1-1 Buydown

1-0 Buydown

1.5-0.5 Buydown

The nomenclature of these buydowns mirrors their functionality. For instance, a 3-2-1 Buydown offers a 3% lower rate for the first year, followed by a 2% reduction in the second year and a 1% decrease in the third year before reverting to the original rate for the remainder of the mortgage term.

Temporary Buydown vs. Adjustable Rate Mortgage

It's crucial to distinguish a temporary buydown from an adjustable rate mortgage (ARM). Unlike an ARM, a temporary buydown is rooted in a fixed-rate mortgage structure. This means that your payment changes are predetermined and follow a set schedule, providing stability and predictability to homeowners.

Decoding Buydown Terms

Buydown terms, such as "3-2-1 buydown" or "2-1 buydown," signify the discount applied to your rate over a 12-month period. The numbers in the term indicate the extent of the rate reduction. Notably, the 2-1 buydown is the most prevalent, reducing the rate by 2% for the first 12 payments and 1% for the subsequent 12 payments before maintaining a steady rate for the remainder of the loan term.

The Mechanics of a Buydown

The magic of a buydown unfolds at the closing of the mortgage. Your rate and payment are fixed for the entire loan term, and a buydown subsidy fund is established. As you commence making payments, your payment is subsidized, offering you a temporary reprieve with a lower payment. Once the subsidy funds are depleted, you revert to the full payment amount.

Illustrating the Benefits: A Practical Example

Consider a $500,000 loan with a 2-1 buydown. In the initial year, you'd enjoy a $576 per month reduction in your payment, accumulating to $10,477 in savings over 24 months. It's a tangible benefit that can make a significant impact on your financial well-being during those crucial early years of homeownership.

Note: The monthly payments shown are principal and interest only and do not include taxes, insurance and any HOA dues.

$576 per month reduction in your payment for the initial year and $10,477 of savings over 24 months

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