Rate Buydown is a payment made by the borrower or a third party to the lender at closing to reduce the interest rate and monthly mortgage payments for a specified period.
A rate buydown is a financial arrangement in which the borrower or a third party makes a payment to the lender at the time of closing to lower the interest rate and subsequent monthly mortgage payments for a set period of time. The purpose of a rate buydown is to provide temporary interest rate relief to the borrower during the initial years of the mortgage.
Typically, a rate buydown involves paying additional upfront fees or points to the lender, which allows the lender to offer a reduced interest rate for a predetermined period. The reduced rate is often set below the prevailing market rate and remains in effect for a specified time, such as the first one to three years of the loan term.
The rate buydown is structured in a way that subsidizes the mortgage payments during the initial period. For example, a common rate buydown arrangement is known as a 2-1 buydown, where the interest rate is reduced by 2% in the first year, 1% in the second year, and then reverts to the original rate for the remaining loan term.
By lowering the interest rate, a rate buydown can make homeownership more affordable and help borrowers qualify for a larger loan amount. It can be a beneficial option for borrowers who expect their income to increase or anticipate financial challenges in the early years of the mortgage.
It’s important to note that the specific terms and conditions of rate buydowns can vary among lenders and mortgage programs. Borrowers should carefully evaluate the costs, benefits, and long-term implications before opting for a rate buydown. Consulting with a mortgage professional or financial advisor is recommended to understand the potential impact on your overall financial situation.