Buying a home can be an expensive proposition, especially considering the ongoing mortgage payments. However, there are ways to save money on your monthly payment, and one of them is interest rate buy downs. In this post, we’ll explain what an interest rate buy down is, and we’ll explore the two most common types: the 2-1 buy down and the 3-1 buy down.
What is an Interest Rate Buy Down?
An interest rate buy down allows homebuyers to reduce the interest rate on their mortgage loan for a specified period, which results in lower monthly payments. Typically, a buy down requires the buyer or seller to pay additional upfront costs, but it can pay off in the form of lower monthly payments over the life of the loan.
2-1 Buy Down
A 2-1 buy down is one of the most common types of interest rate buy downs and can help borrowers lower their initial payments. With a 2-1 buy down, the interest rate on a mortgage is reduced by 2% in the first year of the loan, and 1% each year in the second and third years. By the fourth year, the interest rate returns to the original rate for the remainder of the loan term.
For example, let’s say you’re taking out a 30-year fixed-rate mortgage with an interest rate of 4.5%. With a 2-1 buy down, the interest rate drops to 2.5% in the first year, 3.5% in the second year, 4.5% in the third year, and then returns to a fixed rate of 4.5% for the remainder of the term.
3-1 Buy Down
A 3-1 buy down is similar to a 2-1 buy down, but instead of reducing the interest rate for two years, it reduces it for three. With a 3-1 buy down, the interest rate on a mortgage is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. After that, the interest rate returns to the original rate.
Using the same example as before, let’s say you’re taking out a 30-year fixed-rate mortgage with an interest rate of 4.5%. With a 3-1 buy down, the interest rate drops to 1.5% in the first year, 2.5% in the second year, 3.5% in the third year, and then returns to a fixed rate of 4.5% for the remainder of the term.
Benefits of Interest Rate Buy Downs
Overall, interest rate buy downs have several benefits. They can help homebuyers save money on their monthly payments, which can make homeownership more affordable. Additionally, they can make it easier for homebuyers to qualify for a mortgage, as the reduced payments can lower the debt-to-income ratio. Finally, interest rate buy downs can help home sellers attract buyers and close deals faster, as the option to lower monthly payments can be a significant selling point.
In conclusion, if you’re a homebuyer looking to save money on monthly payments and qualify for a loan, an interest rate buy down may be an excellent option for you. By using this strategy, you can lower your initial payments and save money over the life of your mortgage. Additionally, you have the flexibility to choose between a 2-1 buy down or a 3-1 buy down, depending on your financial situation and goals. For information on interest rate buy downs, contact me and I will connect you with a lender who can answer all of your home financing questions.