Ease into a Mortgage with a Temporary Interest Rate Buydown
In today’s mortgage market, finding ways to make homeownership more affordable is key. One effective option is a temporary rate buydown mortgage. What is a rate buydown and how can it benefit borrowers? Let’s explore how a mortgage buydown works, types of buydowns, and unique advantages of these programs – especially in higher interest rate environments. Plus, learn how Supreme Lending offers a variety of buydown options to fit unique mortgage needs, including the possibility of combining down payment assistance with a temporary rate buydown, offering more affordability for first-home homebuyers.
How Does a Temporary Rate Buydown Mortgage Work?
A temporary rate buydown mortgage allows borrowers to reduce their monthly mortgage payment with a lower interest rate for a specific period of time, generally the first one to three years of the loan term. This means lower monthly payments during the agreed upon years of the mortgage. The cost difference is covered by an upfront lump sum, typically paid by the seller, builder, or lender at closing. A portion of the funds is released from an escrow account each month to cover the interest difference.
As the name suggests, these buydowns are temporary. After the buydown period ends, the mortgage interest rate resets to the original, higher rate for the remainder of the loan term.
Types of Rate Buydowns
Temporary rate buydowns can be applied to a variety of mortgage types including Conventional, FHA, and VA loans. Additionally, there are different buydown options depending on the program and duration of the initial rate buydown.
1-Year Buydown (1-0 Buydown)
- In the first year, the interest rate is reduced by 1%.
- From the second year onward, the interest rate reverts to the original note rate.
- This option may be ideal for buyers expecting their income to increase in the near future.
2-Year Buydown (2-1 Buydown)
- In the first year, the interest rate is reduced by 2%.
- In the second year, the rate is reduced by 1%.
- From the third year onward, the interest rate reverts to the original note rate.
- This provides a more extended period of lower monthly payments, allowing more time to adjust to the higher rate.
3-Year Buydown (3-2-1 Buydown)
- In the first year the interest rate is reduced by 3%.
- In the second year, the rate is reduced by 2%.
- In the third year, the rate is reduced by 1%.
- From the fourth year onward, the rate reverts to the original note rate.
- This offers the longest period of reduced payments for affordable financing.
Benefits of Buydowns in a Higher Rate Market
Lower Initial Payments
The primary benefit of a temporary rate buydown mortgage is lower monthly payments during the early years of the loan. This can be especially beneficial in a higher-rate market, making homeownership more accessible.
Financial Flexibility
Lower initial payments can provide the flexibility needed to handle other expenses associated with purchasing a home, such as relocating costs, furnishing the new home, or making home renovations or repairs.
Gradual Adjustment
A buydown allows borrowers to ease into the full mortgage payment gradually, giving them time to adjust their budget and plan accordingly.
Possibility to Refinance* If Rates Drop
Temporary rate buydown mortgages are a great option to provide lower initial monthly payments during the specified buydown period. After that, if interest rates drop below the original note rate, the borrower may have the option to refinance to a lower rate. This may save costs in interest over the life of the loan.
*By refinancing an existing loan, total finance charges may be higher over the life of the loan.
Supreme Lending’s Buydown Options
Supreme Lending is proud to offer several buydown options to suit individual mortgage needs. Our experienced mortgage professionals can help you explore 1-year, 2-year, and 3-year buydown programs to see if this option is right for you. We may also be able to apply a temporary rate buydown with our Supreme Dream Down Payment Assistance program, making homeownership even more accessible. This combination may significantly reduce upfront costs and monthly payments in the early years of the mortgage.
To learn more about temporary rate buydown mortgages and other home financing options, contact Supreme Lending today.