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What Are Mortgage Buy-downs?

How buy-downs make buying a home more affordable

A temporary interest rate buy-down is a way to temporarily reduce your interest rate when you purchase a home. With a temporary buy-down, you pay an upfront fee in return for a lower interest rate during the first years of a mortgage.

Buy-downs can make your monthly payments more affordable by reducing your interest payments. Homeowners often pay for buy-downs to help close the sale as part of their seller concessions. Lenders and homebuilders can offer them to homebuyers, too. Buy-downs are more common when mortgage rates are high.

How do mortgage buy-downs work?

Mortgage buy-downs are typically good for two or three years, and the interest rate usually changes each year. Common types of mortgage buy-downs include:

  • 3-2-1 mortgage buy-downs. These buy-downs last for three years. During the first year, your interest rate is reduced by 3%. During the second year, it’s reduced by 2%. During the third year, it’s reduced by 1%.
  • 2-1 mortgage buy-downs. These buy-downs last for two years. During the first year, your interest rate is reduced by 2%, and during the second year, it’s reduced by 1%.
  • 1-1 mortgage buy-downs. These buy-downs reduce the borrower’s interest rate by 1% for the first two years of the loan.

Once the buy-down expires, your interest rate will return to the loan’s original rate. For example, if your mortgage interest rate is 6%, and you have a 2-1 buy-down, then your rate will be 4% during the first year, 5% during the second year, and 6% during the third year.

To qualify for a buy-down, you need to be approved for the mortgage at the full interest rate. This means, using the example above, you would need to be approved for a loan with a 6% interest rate.

How much can buy-downs lower mortgage payments?

Buy-downs can significantly lower your monthly payments for a short period of time. Take a look at this sample payment for a $300,000 mortgage that has a 6% interest rate and a 2-1 buy-down.

Year Interest Rate Principal & Interest Taxes & Insurance PMI Total Payment
1 4% $1,432 $358 $195 $1,985
2 5% $1,610 $358 $195 $2,163
3 6% $1,799 $358 $195 $2,352

This example assumes the buyer purchased the home for $350,000 with a $50,000 down payment and a 30-year, fixed-rate, Conventional mortgage. Your mortgage payments might vary from this example. To estimate your unique payments, check out our mortgage payment calculator.

How much do mortgage buy-downs cost?

The cost of mortgage buy-downs is based on the amount of money you are saving each month on interest payments. For example, a 1-1 buy-down that saves you $100 a month in interest payments for two years might cost the seller $2,400.

Do mortgage buy-downs save you money?

Buy-downs can save you money when the seller pays the costs as part of the sales agreement. When you are thinking about paying for a buy-down yourself, consult a financial professional to decide if the costs make sense for you.

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