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. For example, in a 3-2-1 buydown, a homeowner would pay lower payments on their mortgage for the first three years. For each of the first three years, the interest rate would increase incrementally by 1% annually. During the fourth year of the mortgage loan, the full interest rate would apply. Similarly, a 2-1 buydown offers buyers a discount on their rate for the first two years of the loan. 

 

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. Below are examples from Investopedia, of two different mortgage buydowns. 

 

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Loan Breakdown: 3-2-1 Buydown 

 

Year  Monthly Payment   Interest Rate 
$1,158  3.75% 
$1,304  4.75% 
$1,459  5.75% 
$1,622  6.75% 

 

The buydown fee for the loan would be $11,324. 

 

Loan Breakdown: 2-1 Buydown  

 

Year  Monthly Payment   Interest Rate 
$1,304  4.75% 
$1,459  5.75% 
$1,622  6.75% 

 

The buydown fee for this loan would be $5,759.  

 

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? 

 

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

 

Talk to a Loan Officer to discuss if a buydown program would work best for your home financing needs. 

 

Pros of Mortgage Buydowns 

 

  • 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.  

 

Cons of a Mortgage Buydown 

 

  • Ongoing affordability: If your income has dropped since purchasing your home, 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. 

 

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. 

 

If you would like to learn more about a mortgage buydown and our no-cost refinance program, contact Direct Mortgage Loans today!  

 

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). Direct Mortgage Loans, LLC office is located at 11011 McCormick Rd Suite 400 Hunt Valley, MD 21031. This is a paid endorsement. Equal housing lender.