The market has cooled, and mortgage interest rates are up, but don’t lose faith! There are many options out there to help benefit buyers and sellers struggling in the current market conditions. A popular financial strategy is mortgage interest rate buydowns. Mortgage interest rate buydowns allow home buyers to reduce their monthly mortgage payments during the first few years of homeownership and can benefit both buyers and sellers.
What is a Mortgage Interest Rate Buydown?
An interest rate buydown is when a homebuyer provides an additional fee upfront for a lower interest rate on their mortgage loan. This fee is usually paid by the seller as a way to make their home more attractive to potential buyers. While the seller typically pays for the buydown, the cost can be included in the purchase price or negotiated as part of the overall terms of the sale.
The buydown is a type of prepaid interest and can be structured in multiple ways. A typical buydown type is a 2-1 buydown, in which the interest rate is reduced by 2% in the first year of the loan and by 1% in the second year. Another form is a 3-2-1 buydown, which reduces the interest rate by 3% in the first year, 2% in the second year, and 1% in the third year.
