Mortgage rates rarely remain static for long. Like most things, they experience seasons and cycles that climb and plummet, keeping everyone on their toes — from buyers to sellers to realtors and mortgage professionals.
Although those seasons of change may seem tumultuous for different reasons, they actually create opportunities for creativity when it comes to financing, for both buyers and sellers. And one of those creative financing options includes what is known as an interest rate or mortgage “buydown.”
A buy-down is also sometimes referred to as “paying points” or “paying discount points.” The term “buy-down,” however, most aptly describes the goal of the financing opportunity — which aims to lower the interest rate for a mortgage on a short-term or permanent basis. The cost of a buy-down varies as it is dependent on the size of the mortgage.
Buydowns are particularly attractive when rates are on the high side, or are still climbing. And, they make sense for buyers who want or need to purchase a home at a time when they expect their income to increase in the years ahead. Buying down the interest rate on a mortgage is, after all, an upfront investment on short-term comfort knowing the financial outlook will likely improve in the years to come.
Good examples of these circumstances may include a one-income household transitioning to a two-income household or a two-income household improving its financial footing thanks to promotions or other new opportunities on the horizon.
In addition, sometimes buyers ask sellers to cover the cost of a buydown as part of a concession for a transaction. A seller, however, may make up for that incentive by increasing the purchase price of a property.
Regardless of the circumstances, permanent mortgage rate buydowns are recommended for buyers who anticipate living in a home for more than five years since it requires an investment up front, and that investment is often equal to the interest the buyer will save over the course of the buydown period. In addition, they are recommended for buyers who have enough cash to cover a down payment, closing costs and the few to several thousands of dollars it costs to pay for a buydown.
This is where it is important for buyers to work with a trusted and experienced lender who not only understands the market, but also truly understands the buyer’s needs and intentions. Because, when it comes to mortgage or interest rate buydowns, there are a number of different options out there. Here are the most common.
- Loan life. Buyers have an opportunity to buy down the interest rate on a mortgage for the life of the loan.
- 1-0 Buy-down. This allows a buyer to lower the interest rate by 1% of the 30-year mortgage rate for one year, which reduces the monthly payment.
- 2-1 Buy-down. This allows buyers to lower their interest rate by 2% the first year and 1% the second year of a 30-year mortgage rate, reducing the monthly payment for a bit longer.
There are a number of different interest rate buy-down options for buyers looking to secure a mortgage, and the best fit really depends on the individual, the financial circumstances, the market and the size of the loan.
If you’re considering a home purchase or sale, the team at Halpern Residential is ready to help. We keep an eye on market trends so you don’t have to. Moving or investing in real estate is an exciting time of transition, and we’re ready to help you with it. Contact us today so we can learn more about how we can support your needs.