What is a Buydown?
How Does a Buydown Work?
Let's say John Doe wants to borrow $100,000 to buy a house from Jane Smith. The lender says the interest rate on 30-year is currently 5%. However, the lender also says that John can buy down the interest rate. To do this, John pays the bank, say, $1,000 now (usually 1% of the ) and in return the bank changes the interest rate on the to 4.75%. This costs John more up front, but it lower his payments for the next 30 years.
There are different kinds of buydowns. A 2-1 buydown, for example, is a buydown that lasts two years and involves a series of increases over that time, up to the permanent rate. A 3-1 buydown is the same idea but spans three years instead of two.
Why Does a Buydown Matter?
Buydowns can apply to the entire
Sometimes, in order to close a deal, the seller of the property to pay for the buydown. In our example, this would that Jane Smith pays the $1,000. However, Jane might just increase the price of the house by $1,000 to cover the expense.
It is important for buyers to weight the cost of the buydown against the monthly that come from lower payments. If the buyer only expects to be in the house for, say, five years, the buyer would pay more for the buydown than he ends up saving in lower monthly payments.