This Maneuver Can Help You Pay Less on Your Mortgage (Temporarily)
How ‘bout them interest rates? If you’re in the market for a home, the 8 percent interest rates are a notable pain point — especially when you consider that homebuyers just a couple of years ago were locking in record-low rates under 3 percent on 30-year fixed mortgages. The difference between those two rates can translate to hundreds of extra dollars owed each month on a mortgage payment.
So, as you’re shopping for a house, there are several strategies to be aware of that can help you save on your monthly payments — things like assumable mortgages and grants for first-time homebuyers. But you may also be hearing some buzz about “mortgage buydowns.” Perhaps you’ve even seen them referenced in real estate listings. But what exactly is a mortgage buydown, and can it help save you money on your monthly payments?
Mortgage buydowns can help lower your monthly interest rates for the first year (or two or three) of your mortgage, but the buydown does have to be purchased upfront. Here’s what a buydown structure might look like, according to Boris Cherner, a senior mortgage banker at Capital Bank.
1-0 Buydown: With this kind of buydown, the interest rate is reduced by 1 percentage point for the first year and returns to the market rate for the remaining term of the loan.
2-1 Buydown: In a 2-1 buydown, the interest rate is reduced by 2 percentage points for the first year, 1 percentage point for the second year, and returns to the market rate for the remaining term of the loan.
3-2-1 Buydown: In a 3-2-1 buydown, the interest rate is reduced by 3 percentage points for the first year, 2 percentage points for the second year, 1 percentage point for the third year, and returns to the market rate for the remaining term of the loan.
Although the monthly mortgage payment is lower during the temporary buydown period (emphasis on temporary), the total cost of the loan will be higher due to the interest that accrues over time, Cherner explains.
Cherner also points out that a buydown is a type of mortgage financing where the interest rate is temporarily reduced for a specified period of time, whereas a method like buying mortgage points is a way to pay upfront to permanently reduce your interest rate.
Financially, it might not make sense to go the buydown route — especially if you’re the one paying for it. You’ve got to do the math to make sure the “juice is worth the squeeze,” says Christopher Roberti, the director of strategic growth and a mortgage loan originator with Hartford Funding in Long Island, New York.
So, the first thing to figure out is whether you’ll save more in interest than what the buydown fee costs you. The other thing to consider is that if you refinance in the near future, Roberti says, those discount points that were paid for could become sunken costs. “These funds could be better used down the road when refinancing,” he explains.
Mortgage buydowns aren’t super common, but they can come about in certain markets where sellers or builders are looking to sweeten the deal for buyers, explains financial planner Khwan Hathai, CFP, with Epiphany Financial Therapy.
“The immediate benefit of a buydown is a more manageable mortgage payment in the early years of homeownership, which can be quite appealing,” Hathai says. “On the flip side, this financial relief is temporary, and the upfront cost can be significant.”
In a nutshell, buydowns — especially those offered by sellers or builders — can be good for someone who is confident their financial future is going to improve in the near future, says financial planner Jason Ball, CFP. “That could be someone with a child that has one or two years left in daycare or someone pursuing an advanced degree whose income will be increasing,” Ball explains.
Many mortgage brokers offer buydowns, but not all banks do, he says. If it’s something you’re interested in, shop around and find a broker who can offer buydowns.
