When it comes to buying a home, securing an affordable mortgage is often at the top of every homebuyer’s wish list. Mortgage interest rates play a role in determining monthly payments and the overall cost of homeownership. One strategy that can help buyers achieve lower initial mortgage payments is a temporary rate buy down. We will explore what temporary rate buy downs are, how they work, and the benefits.
For more information on how buy downs work, check out my video!
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WHAT IS A TEMPORARY RATE BUY DOWN?
A temporary rate buy down is a financing strategy used to reduce the initial interest rate on a mortgage loan. This reduction in the interest rate applies for a specific period at the beginning of the loan term, often the first few years. The primary goal of a temporary rate buy down is to make homeownership more affordable by lowering the borrower’s initial monthly mortgage payments.
HOW DOES IT WORK?
The mechanics of a temporary rate buy down involve an upfront payment, made either by the seller, or a third party (such as a builder). This payment is used to “buy down” the interest rate. The money is held in an escrow account and is disbursed to the lender to cover the difference between the reduced interest rate and the actual interest rate specified in the mortgage contract. Temporary buy downs are offered as 3-2-1, 2-1, and 1-1 terms.
For example, if the borrower qualifies for a 30-year fixed-rate mortgage at 6.5%*, a 3-2-1 buy don reduce the initial rate to 3.5% for the first year, 4.5% the second year, and 5.5% for the third year. After the specified period (in this case, three years), the interest rate would revert to the original 6.5%, and the borrower would continue making payments based on that rate for the remainder of the loan term.
TEMPORARY BUY DOWNS, THE MOST EFFECTIVE WAY TO LOWER A MORTGAGE PAYMENT
There is no better way to lower a monthly mortgage payment than with a temporary rate buy down. The reduction in monthly payment is more than any other product available. The subsidy provided is also fully refundable in the event of a loan payoff or refinance. Pair this product with our rate protection program and save big on your home loan today!
My Team and I are always available to answer any questions or assist in any way, so feel free to reach out!
About the Author
Stephanie Johnston
Senior Loan Officer| NMLS #621637
Combining over three decades of industry knowledge, The Johnston Team is thoroughly dedicated to matching each borrower to the perfect loan program.
Team leader Stephanie Johnston began her mortgage career shortly after graduating from The University of North Texas. Utilizing an approach that combines both creative and analytical problem solving Stephanie has built a reputation for offering honest, detail-oriented guidance for her clients. As part of Service First Stephanie has a place to build her team in an environment dedicated to putting borrowers first.
Whether you’re purchasing your fifth home or your first The Johnston Team has the knowledge and experience to find the loan that’s right for you.
*Date scenario was generated: 09/07/2023, Loan Program: Conventional, Term: 30 Year, Purchase Price: 400,000, Down Payment: $80,000, Loan Amount: $320,000, Discount Points: 1.00, Credit Score: 780
Year 1 Rate: 3.75% APR: 6.97% Monthly Payment (Principle & Interest Only): $1,481.97
Year 2 Rate: 4.75% APR: 6.97% Monthly Payment (Principle & Interest Only): $1,669.27
Year 3 Rate: 5.75% APR: 6.97% Monthly Payment (Principle & Interest Only): $1,867.43
Year 4/Final Rate: 6.75% APR: 6.97% Monthly Payment (Principle & Interest Only): $2,075.51
Monthly payment estimates do not include taxes, insurance, and assessments. Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Service First Mortgage Corporation is not affiliated with the U.S. government, HUD, FHA, VA, or any other government agencies. For additional information about Service First Mortgage, visit sfmc.com or the NMLS Consumer Access page at www.nmlsconsumeraccess.org.
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