The Buydown Loan: How to Get a Lower Rate the First Couple Years on Your Mortgage

Today we’re going to talk about a “buydown loan,” the latest effort by the mortgage industry to provide much-needed payment relief to borrowers.

In recent months, mortgage rates effectively doubled, straining affordability and cooling the housing market.

These higher rates have also had a big impact on the mortgage industry, which is typically reliant on low rates to fuel its important mortgage refinance business.

Mortgage lenders understand the impact these higher rates have had on borrowers and prospective home buyers, so there’s a good chance you’ll see more of these offers pop up soon.

Let’s discuss how these buydown mortgages work, if they can save you money, and the general pros and cons.

What Is a Buydown Mortgage?

In short, a buydown mortgage is a home loan that features a reduced interest rate for a temporary period of time, whether it’s one, two, or three years.

The interest rate may be 2% lower in year one, 1% lower in year two, and then the standard note rate thereafter.

An upfront cost covers these lower monthly payments, with the required funds set aside in a buydown account.

Each month during the temporary buydown period, the borrower makes a reduced monthly payment, with the an additional amount released from the buydown account to cover the difference.

This makes monthly payments more affordable during the beginning of the loan term.

Typically, borrowers opt for these buydowns because they expect their income to increase in the near future. Or the buydown is offered by a home builder or home seller to sweeten the deal.

To that end, these buydowns are often paid by a home seller or builder, or perhaps a mortgage lender.

It may also be possible to apply seller concessions toward a temporary mortgage buydown.

Recently, United Wholesale Mortgage (UWM) and CrossCountry Mortgage have introduced temporary buydown programs to offset high mortgage rates.

Types of Buydown Mortgages

$400,000 loan amount with 2-1 buydown Interest Rate Monthly Payment Monthly Savings Annual Savings
Year 1 3.5% $1,796.18 $474.98 $5,699.76
Year 2 4.5% $2,026.74 $244.42 $2,933.04
Year 3-30 5.5% $2,271.16 $0 $0

2-1 Buydown

There are several buydown loan options out there, with the “2-1 buydown” perhaps the most common.

As the name suggests, it lowers your interest rate by a full 2% the first year, and 1%…

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