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What is a Mortgage Buydown?
A mortgage buydown is a financing technique where the borrower secures a lower interest rate for the initial years of the mortgage, resulting in reduced monthly payments during that period. This is typically achieved by paying an upfront fee, known as “discount points” or “buydown points.”

How Does It Work?
Types of Buydowns:
1-0 Buydown: The interest rate is reduced by 1% the first year, then from year 2 forward you will pay based off the original rate you locked during your purchase.
2-1 Buydown: The interest rate is reduced by 2% in the first year and by 1% in the second year. The rate returns to the original fixed rate from the third year onwards.
3-2-1 Buydown: The interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. From the fourth year onwards, the rate returns to the original fixed rate.

Payment Structure:
Year 1: Lower interest rate (e.g., 2% lower than the fixed rate)
Year 2: Slightly higher interest rate (e.g., 1% lower than the fixed rate)
Year 3 and Beyond: Original fixed interest rate
Upfront Costs:
The borrower, seller, or lender pays an upfront fee to cover the cost of the reduced interest rate. This fee is calculated based on the difference between the reduced payments and the original payments over the buydown period.

Pros and Cons of Mortgage Buydowns

Pros:
Lower Initial Payments: Helps borrowers manage their finances better in the initial years.
Easier Qualification: Lower initial payments can make it easier to qualify for a loan.
Flexibility: Can be beneficial for borrowers expecting their income to increase in the future.

Cons:
Upfront Costs: Requires a significant upfront payment, which might not be feasible for all borrowers.
Temporary Relief: The reduced payments are temporary, and borrowers must be prepared for higher payments in the future.
Complexity: Understanding and calculating the benefits can be complex.

Is a Mortgage Buydown Right for You?
A mortgage buydown can be a great option if:
You expect your income to increase in the near future.
You have the funds available for the upfront costs.
You plan to sell or refinance the home before the buydown period ends.
However, it’s essential to carefully consider your financial situation and future plans before opting for a buydown.

Contact me today to learn more
[email protected] or (308) 249-6441