A mortgage interest rate buydown is a financial strategy in which a borrower, lender, or third party pays a lump sum at the beginning of a mortgage in order to temporarily lower the interest rate on the loan. This is typically done to make the mortgage payments more affordable for the borrower in the early years of the loan.
There are a few different types of mortgage interest rate buydowns. One of the most common is the temporary buydown, which lowers the interest rate for a specific period of time, usually the first few years of the loan. For example, if the interest rate on a 30-year fixed-rate mortgage is 4%, a temporary buydown might lower the rate to 3% for the first three years of the loan.
Another type of buydown is the permanent buydown, which permanently lowers the interest rate on the loan for the entire term of the loan. This type of buydown is less common, but it can be more beneficial for borrowers who plan to stay in their home for an extended period of time.
The cost of a mortgage interest rate buydown is typically paid upfront in the form of points. Points are a one-time charge assessed at closing, each point is equal to 1% of the loan amount, the more points paid, the lower the interest rate will be.
A mortgage interest rate buydown can be a useful strategy for borrowers who are looking to make their mortgage payments more affordable in the short-term, but it's important to consider the long-term costs and benefits of the strategy. Borrowers should also keep in mind that the lower interest rate may result in higher payments when the buydown period ends.
A mortgage interest rate buydown is a financial strategy in which a borrower, lender, or third party pays a lump sum at the beginning of a mortgage in order to temporarily lower the interest rate on the loan. This can be useful for borrowers looking to make their mortgage payments more affordable in the short-term, but it's important to consider the long-term costs and benefits of the strategy, and to be aware that the lower interest rate may result in higher payments when the buydown period ends.