Temporary Buydown
Author: Terri Ewing
Published: July 29, 2008
Temporary Buydown Defined
A temporary buydown is when the interest rate is lowered for the first few years for an upfront fee.
The most common temporary buydown is the 2-1 buydown. That means the interest rate is 2 points lower for the first year of the loan then 1 point lower for the second year of the loan and on the third year it stays at the original rate. There is a cost for a temporary buydown (usually around 2.375 points) that can be paid by you, the seller, or by increasing the rate.
For example, if the rate for your loan is 6.5%, then the rate for the first year of your 2-1 buydown would be 4.5%. Then, the second year your rate would be 5.5%. The third year the rate would be the 6.5% and it will stay at that rate for the life of the loan. The money collected at closing (the buydown fee) sits in an escrow account and it used by the lender to make up the difference each month.
These work out well for those whose income will be increasing but the lower payment in the interim is very helpful. The buydown fee is pretty steep but the seller can pay it as part of their seller contributions. See Seller Contribution.
Author: Terri Ewing
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