A temporary buydown mortgage is a home loan program that allows for a short-term reduction of the interest rate for a specified period of time. The short-term reduction comes with a cost that is paid by the homebuyer or the seller of the property.
Quick Snapshot
- A Temporary buydown mortgage allows for a lower mortgage payment during the first, second, and/or third year of your home loan.
- There are many different options, the most popular being the 2-1 buydown.
- The temporary buydown mortgage comes with an increased cost to either the homebuyer or the seller.
How Does A Temporary Buydown Mortgage Work?
Examples of a temporary buydown mortgage are a 2-1 temporary buydown and a 3-2-1 temporary buydown. For a 2-1 buydown the mortgage interest rate is lowered from the original note rate by 2% in the first year, 1% in the second year, and in the third year it reverts to the original note rate for the remainder.
For the 3-2-1 buydown option, the interest rate is lowered from the original note rate by 3% in the first year, 2% in the second year, and 1% in the third year. After that, it reverts to the original note rate for the remainder of the loan term.
Simply put, with a temporary buydown mortgage you are “pre-paying” the mortgage interest owed for a number of years upfront. It’s important to know that this program’s pre-payment of mortgage interest is not discount points. When a mortgage lender charges discount points, that’s a permanent interest rate reduction.
What loan programs allow for a temporary buydown?
Most home loan lenders offer a temporary buydown option on 30-year fixed Conforming home loans and FHA home loans. Home loan lenders do not typically offer a temporary buydown program for 20-year or 15-year fixed-rate mortgage programs. Fannie Mae home loans (ie Conforming home loans) are the most popular among homebuyers.
There are some Conventional loans (that are non-conforming) that also offer the program however their availability is limited.
Temporary Buydown Chart
Here is a temporary buydown chart showing you how a 3-2-1 buydown works for a 30-year fixed-rate home loan. The example is based on an original Note rate of 7.00%, and a loan amount of $400,000.
| Interest Rate | Year | Payment |
|---|---|---|
| 4.00% | First-year | $1909.66 |
| 5.00% | Second-year | $2,147.29 |
| 6.00% | Third-year | $2,398.20 |
| 7.00% | Fourth-year | $2,661.21 |
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What Are The Costs For A Temporary Buydown?
There is always a cost to do a temporary buydown mortgage that varies from lender to lender and the type of temporary buydown program. A 2-1 temporary buydown will have a lower cost structure than a 3-2-1 temporary buydown.
The costs associated with the temporary buydown can be high. In most cases thousands of dollars so it’s important to request a clear breakdown of what you (or the seller) are paying to lower the interest rate.
For example, if a home loan lender offers a 3-2-1 temporary buydown at a cost of three points on a $400,000 loan then the cost is $12,000 (paid by the homebuyer or the seller). It’s important to keep in mind that you are simply pre-paying the interest which differs from an actual cost of service (ie the cost of an appraisal or home inspection).
If I decide to refinance after one year will the lender refund the cost to do the temporary buydown?
Great question and the answer is no. This is why you want to make certain a temporary buydown mortgage is for you. The last thing you want to do is spend thousands of dollars on a temporary buydown mortgage, not to see its full benefit.
Is the cost to obtain a temporary buydown mortgage tax deductible?
Since tax laws constantly change I suggest you contact your CPA or tax professional to obtain the most current answer. Technically you are pre-paying the interest when you do a temporary buydown and mortgage interest is usually tax-deductible so for many homeowners there might be a tax benefit.
Pros And Cons of A Temporary Buydown Mortgage
Here are the pros and cons of a temporary buydown mortgage.
Pros
- Lower interest rate at the beginning of the loan period
- Lower monthly mortgage payment at the start of the loan
- Allows for an easier transition into paying a mortgage
Cons
- Higher upfront costs
- Change in payments for the first 1-3 years.
- If interest rates move lower, refinancing is less attractive due to the buydown cost.
Temporary Buydown Mortgage Requirements
The requirements for a temporary buydown mortgage are similar to a regular home loan. The rate used to qualify you is based on the original note rate, not the buydown rate. These requirements are subject to change without notice.
- 620 credit score
- 3% or more down
- Loan amount up to $2,500,000
- Debt-To-Income ratio of 50% or less
- Primary residence, secondary residence, and investment properties
- Documentation to support your income and if needed liquid assets
- Single Family Residence, Condominiums, and Multi-unit properties (up to four units) are allowed
- Previous Bankruptcy and/or Foreclosure are allowed under certain circumstances
- Most temporary buydown programs do not have a pre-payment penalty but some do
These are the base requirements for a temporary buydown mortgage approval from underwriting.
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Should I Go With A Temporary Buydown Mortgage?
Some homebuyers could really benefit from the temporary buydown mortgage program while others will not. It’s important you discuss the pros and cons with your Loan Officer to see if the program is a good fit for you and your short – long term goals.
As long as you fully understand the program and there’s a clear benefit to you then yes the temporary buydown mortgage is a great program. Just make sure you keep the mortgage during the entire buydown period to receive the full benefit.
