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Seller-Paid Buydown Strategy: A Guide for Homebuyers

If you're a buyer trying to purchase in today's market, you might have heard of a "rate buydown." However, like many consumers, you may not fully understand how they work, which one to select, and why it would benefit you and your family.

What Is a Buydown?

A buydown is a mortgage financing technique where the buyer secures a lower interest rate for at least the initial few years of the mortgage, or potentially for its entire duration. Buydowns can be categorized into two types: permanent and temporary.

Permanent Buydown

In a permanent buydown, the interest rate is reduced for the entire life of the loan. This is typically achieved by paying discount points upfront at closing. Each discount point usually costs 1% of the loan amount and can reduce the interest rate by a specified amount, such as 0.25%.

Pros of Permanent Buydown:

  • Long-Term Savings: The reduced interest rate for the life of the loan results in significant interest savings over time.
  • Predictability: Monthly payments remain consistent, providing stability and predictability in your budget.

Cons of Permanent Buydown:

  • Higher Upfront Cost: Paying for discount points increases the initial cost of obtaining the mortgage.
  • Longer Break-Even Period: It may take several years to recoup the upfront cost through monthly savings.

Temporary Buydown

A temporary buydown offers a lower interest rate for the initial few years of the loan before reverting to the standard rate. Common types include the 2-1 buydown and the 3-2-1 buydown.

2-1 Buydown

  • First Year: Interest rate is significantly reduced.
  • Second Year: Slightly higher rate than the first year but still below the standard rate.
  • Third Year Onwards: Full interest rate applies.

3-2-1 Buydown

  • First Year: Interest rate is reduced by 3%.
  • Second Year: Interest rate is reduced by 2%.
  • Third Year: Interest rate is reduced by 1%.
  • Fourth Year Onwards: Full interest rate applies.

Pros of Temporary Buydown:

  • Initial Savings: Lower monthly payments in the initial years can ease the financial burden and help buyers adjust to homeownership.
  • Flexibility: Beneficial for buyers expecting their income to increase in the future.

Cons of Temporary Buydown:

  • Rate Increase: Once the buydown period ends, monthly payments increase to the full rate, which can be a financial shock if not anticipated.
  • Potential Strain: If income does not increase as expected, buyers may struggle with higher payments.

Comparing Permanent and Temporary Buydowns

Cost:

  • Permanent: Higher upfront cost due to discount points.
  • Temporary: Lower upfront cost, typically covered by the seller.

Savings:

  • Permanent: Long-term interest savings.
  • Temporary: Short-term savings with higher payments later.

Best for:

  • Permanent: Buyers planning to stay in the home for a long time and who can afford the upfront cost.
  • Temporary: Buyers needing initial payment relief and expecting income growth in the near future.

Choosing between a permanent and temporary buydown depends on your financial situation, future income expectations, and how long you plan to stay in the home. Carefully evaluate your options to determine which buydown type aligns with your financial goals and circumstances.

Buyer Motivation: Do you have Buyers that have left the market until the following year?

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"Tony was great. He worked very hard for us and I appreciate all his effort. There were some areas of improvement with Movement Mortgage. First communication was often just with the male in the relationship despite the female being the main financial support. This could have been just been happenstance but as the female it’s frustrating when only the male is communicated with for financial matters or when emails are sent to you with the male counterparts name only because this is stereotypical. All communication should be between all parties involved in the purchase. Also we were contacted by a scammer during closing asking to wire money. The scammer had so much of our information that it is obvious your systems were hacked and the email was sent using a name of Movement’s actual employee. Better care should be taken to protect your clients and clients should be warned verbally and in writing that this occurs and movement should provide direction/ confirmation on procedures when wiring is anticipated. Although this may occur regularly in the industry- clients are unaware of this and Movement Mortgage can adopt what the title agency does to educate their clients."

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