A mortgage rate buydown, or ‘buydown’ for short, is when a borrower pays more money upfront to secure a more manageable, lower interest rate for the first few year(s) of their mortgage. Furthermore, a borrower pays an additional charge at closing known as discount points, or ‘mortgage points,’ as a form of prepaid interest. Think of mortgage points like you would a store membership card where customers pay a fee to obtain a discounted price. 

 

 

How are mortgage points calculated? 

A mortgage point can be used to lower your home’s interest rate, with each point equaling 1% of your total loan. For example, on a $500,000 mortgage 1 point would cost you $5,000 at closing ($500,000 making the cost of your mortgage point $5,000). 

 

When should you buydown your mortgage?  

The decision to buy down your mortgage rate requires you to evaluate your plans and financial situation for the future. Here are some scenarios in which a borrower would benefit from a buy-down mortgage:  

  • If you anticipate your income will increase in the future.
  • If you can afford the higher payment but want to line your savings during the lower rate period years. 
  • If you anticipate selling your home or refinancing your home, soon. 

Mortgage Buydown Pros 

  • Interest Savings: Can temporarily reduce your interest rate by lowering your monthly payment during the initial loan term.   
  • Price Reduction: This may allow the buyer to pay less from home than the listing price if a seller is offering to pay something toward the buydown. 
  • Ease into higher payment: Option for homebuyers whose incomes will or are expected to increase in the years to come.   

Mortgage Buydown Cons 

  • Ongoing affordability: If your income has dropped since purchasing your home, then you may struggle to meet your monthly payments once the initial rate period ends.  
  • Availability: Depending on the type of property, or the type of mortgage you are applying for, the ability to take advantage of a mortgage buydown may be limited.   
  • Default Risk: Greater risk of foreclosure if challenges arise to make higher mortgage payments after the initial buydown period. 

 

Lender-Funded Buydown Programs 

Looking for an alternative program with a low initial interest rate, with the rate protection of a fixed-rate mortgage? Our lender-funded buydown programs allow the cost of the buydown to be built into the pricing and therefore no buydown funds are required at closing!

 

How much does it cost to do a 2-1 buydown?  

In a 2-1 buydown, a borrower temporarily lowers their interest rate during the first two years of the loan term in exchange for an upfront additional charge.  

  • 1st Year: The interest rate starts 2% below the locked interest rate. (Two percentage points) 
  • 2nd Year: The interest rate is 1% below the locked interest rate.  
  • 3rd Year: The loan converts to the locked interest rate. 

*Seller-funded and lender funded options available* 

2-1 Buydown

 

Is a 2-1 buydown worth it? 

With climbing interest rates and a shifting house market, a 2-1 buydown mortgage has become an increasingly popular option for both sellers and buyers. Here are some scenarios in which a 2-1 buydown could benefit you!  

  • Those whose income will increase significantly in the next two years.  
  • Looking for a lower initial payment without an adjustable-rate loan. 
  • Have a spouse returning to the workforce in the next 1-2 years. 
  • First-time home buyers looking for a lower payment in their first years of homeownership.  
  • Those looking to make it faster and easier to sell their home.  

 

How much does it cost to do a 1 ½ – ¾ buydown? 

  • In the first year the rate is brought down 1.5%* below the note rate. *(one and one-half percentage points)
  • The second year the rate increases 0.75% of 1%. *(three-fourths)
  • The third year begins the borrowers’ repayment responsibility for the principal and interest as required by the note. 

 

No Cost-Refinance Program 

Ask us about our No Cost- Refinance Program! If you can afford to purchase today, then you could certainly afford your mortgage if rates drop.* By choosing to work with Direct Mortgage Loans for your purchase, you will have the opportunity for a no-cost refinance up to 2 years after closing. Mention this program to your DML Loan Officer.  

  • No lender fees for refinancing   
  • No out-of-pocket expenses to refinance   
  • Opportunity to purchase now and save later* 
  • You don’t need to worry about finding another lender when you’re ready to refinance. We track rates and will reach out when it makes sense for you.   

*Assuming the same or improved qualifying criteria as at time of purchase. Rate savings subject to market changes. 

Connect With A Loan Officer To Learn More 

 Rates are subject to change. Eligibility and approval are subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Direct Mortgage Loans, LLC is licensed in Maryland. Direct Mortgage Loans, LLC NMLS ID# is 832799 (www.nmlsconsumeraccess.org). Located at 11011 McCormick Rd Suite 400 Hunt Valley, MD 21031. This is a paid endorsement. Equal housing lender.  

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