Mortgage Rate Buydowns are Gaining Momentum Right Now

As mortgages climb and the demand among homebuyers starts to cool down some home sellers are enticing buyers back into the market with a popular incentive first brought to the market in the late 70s and early 1980s. It is the strategy of a temporary buy down.

Why temporary buy downs have grown in popularity lately

One of the popular types of buydowns is known as a 2/1 buydown. This is where the home seller pays to cut the potential homebuyer's mortgage rate by two percentage points for the first year of the mortgage loan and buy one percentage point for the second year.

Mortgage rates have surged to a surprising 7% average and this percentage point breakdown helps to reduce a large portion of the sticker shock that buyers are experiencing with home price increases and interest rate increases.

Temporary buydowns have been around for a long time but have not been used in a frequent capacity since the 1970s when interest rates were in the double digits. They are making a comeback as interest rates have quickly climbed over the past year and are forecasted to continue to do so.

Some of the largest lending companies in the country have begun to market the mortgage rate buy-down tactic. Companies such as Rocket Mortgage and United Wholesale Mortgage as well as Cameron Teeter have used this strategy recently. Rocket Mortgage has advertised its buy-down program as an inflation buster.

How temporary buy-downs work

To best explain how a temporary buydown can work we need to use a specific monetary sample to give the clearest picture. Let's pretend a buyer is interested in purchasing a home that cost $325,000. This pretend buyer is able to put down a 20% payment and is looking to finance a remainder of $300,000 into a mortgage.

If they are able to secure a 7% interest rate on a mortgage loan for the $300,000 amount the payment would be due $1996. If a seller offered a 2/1 by down to help encourage the buyer to purchase their home the interest rate then is lowered to 5% for the first year and to 6% for the second year. The first year the buyer would make payments at $1610 which saves $386 a month. This first your savings out to a total of $4632. 

On the seller's end, the cost of a 2/1 buydown will vary depending on the specific loan that the buyer is qualifying for. In the $300,000 mortgage example, the seller would have to pay anywhere from $6000-$7000 into a private down account that belongs to the potential homebuyer. A portion of this money will be released each month to reduce the buyer's monthly mortgage payments.

Should the buyer try to refinance their home loan while there's still money left in the buy-down account this remaining balance is applied to the new refinance loan.

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