What is an Interest Rate Buydown?
Did you know that mortgage rates can be discounted? It’s actually not common knowledge. And fortunately, for a limited time here at Copper Creek, we are offering interest rate buydown options to lower your monthly payment at no cost to you.
What is an Interest Rate Buydown?
An interest rate buydown allows homebuyers to reduce their monthly mortgage interest rates. There are two types of buydowns: temporary and permanent.
We’re discussing temporary buydowns. Temporary buydowns reduce the interest rate for a specified period of time. For the first few years of the loan, the interest rate is lowered before it goes back to its original rate, with the option to refinance to capture a lower current market rate.
One of the most common types is the 2-1 buydown, where:
- The rate is reduced by 2% the first year
- The rate is reduced by 1% the second year.
- The rate goes back to your current market rate when you purchased your home by year 3 and locks in for the life of the rate. Unless you choose to refinance.
For example: A buyer with a 6% loan gets a 2-1 buydown. The buyer would pay 4% during year one, 5% during year two, and 6% for the remainder of the loan term.
We are also offering a 3-2-1 buydown which is structured like this:
- The rate is reduced by 3% the first year
- The rate is reduced by 2% the second year
- The rate is reduced by 1% the third year
- The rate goes back to your current market rate when you purchased your home by year 4 and and locks in for the life of the rate. Unless you choose to refinance.
For example: A buyer with a 6% loan would pay 3% in year one, 4% in year two, 5% in year three, and 6% in year four and beyond.
How does it save me money?
By selecting either a 2-1 buydown or a 3-2-1 buydown, you don’t have to pay the full interest payment at the start of your loan. It can help you manage monthly costs and adjust to the new monthly mortgage.
What’s even better, if interest rates are lowered by the time your buydown ends, you can refinance your home to get the new interest rate. These buydowns are a perfect opportunity to save money so you can spend it on more things you love.
Who pays the difference in your interest rate?
We do! Temporary buydowns are often funded by sellers, builders, or lenders to make the homes more affordable or appealing. The interest rate doesn’t actually change–it’s the monthly payment that gets temporarily subsidized. Here at Copper Creek, we will contribute an amount for the lender to use to lower your monthly payment for the term of the buydown, with no cost to you!
The builders will deposit the amount they’ll be contributing in an escrow account, typically all upfront. Then the lender pulls from the account to cover the difference each month. if you refinance during the term of your buydown the funds in the escrow account can be used for your loan cost or as a payment against your mortgage, so you don't lose out when you refinance.
Why do builders offer this?
Builders like to offer these deals when mortgage rates are high and many buyers struggle with affordability. It also allows the homebuyer to wait out the high interest rates and get a chance to refinance. Not all builders have the capacity to finance buydowns, that’s why when you come across one, it’s worth looking into.