Interest Rate Buydowns

While you may have found a mortgage quote that suits you, it is important to also understand additional ways in which you can get the mortgage quote that works best for you.

Interest rate buydowns are exactly as they sound. In order for a buyer to secure a 2 to 1 buydown, they pay three points above the current market points in order to receive a below interest market rate for the first two years of the mortgage loan. At the end of those two years the buyers would they be responsible for paying the old rate for the rest of the term.

For example, if the current market rate for a fixed loan is 8.5 percent at a cost of 1.5 points, the buydown provides the borrower a first year rate of 6.5 percent and a second year of 7.5 percent and a third through the 30th year at 8.5 percent and the cost would be 4.5 points. A transferring company usually covers buydowns as a result of the high points associated with them.

Rather than charge higher points to the buyer in the beginning of their loan, in today’s market, mortgage companies have found a way to increase the note rate to cover later years.

Another type of interest rate buydown is the 3-2-1 buydown, which is very similar to the 2 to 1 buydown; except for the fact the starting interest rate is three percent below the note rate. Another option is the flex-fixed buydown where the rate increases at six-month intervals rather than annual intervals.

Another example for a flex-fixed jumbo buydown at a cost of 1.5 points would be an interest rate of 7.5 percent for the first six months. The second six months the rate would be 8 percent, the next would be 8 percent, the next would be 9 percent, and the next 9.50 percent and the 37th month the rate would culminate at 9.875 percent and would remain that for the remainder of the term.

Many buyers will choose an interest rate buydown if they are certain their income will grow in coming years.