In certain markets, Interest Rate Buydowns may be available. In general Buydowns this is how they work. Payments are reduced and figured on a lower interest rate over a specific term. The difference between the “real” note rate and the lowered interest rate is paid in cash by the seller or the buyer. The more common buydowns are 3-2-1 and 2-1.
For example, the 2-1 Buydown with a loan amount of $350,000 which has a fixed interest rate 6.75% for 30 years. To “buy down” the interest rate, the cost would be a lump sum of $8,063.
- First-year interest rate is 4.75%, monthly payment is $1,826.
- Second-year interest rate is 5.75%, monthly payment is $2,043.
- Years three through 30, interest rate is 6.75%, monthly payment is $2,270.
- 1st-year savings (as compared to $2,270 per month) is $444 per month or $6,332.
- 2nd-year savings (as compared to $2,270 per month) is $228 per month or $2,731.
Add up the annual savings: $6,332 + $2,731 = $8,063. Therefore, it costs $8,063 to buy down the interest rate and payments for two full years.
Contact your mortgage professional to discuss the availability of these options for you