Temporary Rate Buydown
Here’s a short and easy way of understanding what a Temporary Rate Buydown is.
- Reason for a Temporary Rate Buydown:
Rates are high. This is a small band-aid to fight with high rates and high monthly payments until rates drop back down and you can refinance. - What is 3/2/1, 2/1, or 1/0 Buydown?
In a 3/2/1 buydown, the number “3” means your rate will be 3% off the first year, the number “2” means your rate will be 2% off the 2nd year, & the number “1” means your rate will be 1% off the 3rd year. - How can I do a buydown?
When buying your home, ask your realtor to request for seller credits. The seller credits can be stored in an impound account to pay for the 3%, 2%, or 1% difference. - What if rates get better after a year and I refinance. What happens to my impound account?
The remaining unused balance will be used to reduce your principal balance during your refinance. - What is the max seller credits I can get? It varies – see below.
Conventional with a down payment less than 10%:3% of purchase price
Conventional with a down payment between 10% – 25%: 6% of purchase price
Conventional with a down payment greater than 25%: 9% of purchase price
Conventional purchasing an investment property: 2% of purchase price
FHA: 6% of purchase price
VA: 4% of purchase price - What happens if I have too much seller credits?
You can use any unused seller credits to cover your closing costs. - Can I still do a 2/1 Buydown without seller concessions?
Yes. You would have to fund your own impound account. - Since the rates are lower for the first few years, do I qualify based off of that lower rate?
No. You have to qualify off the qualifying rate, not the buydown rate. - Example of a 2/1 Buydown | $400k purchase price | 7.375% Interest Rate | 3% down payment | Conventional Loan | $12k in max seller credits | 1.25% property taxes | $900 annual HOI | $126 monthly PMI
Regular Loan Purchase Price $ 400,000.00 Down Payment 3% or $12,000 Interest Rate 7.375% Loan Amount $ 388,000.00 PI Payment $ 2,679.82 Monthly Taxes $ 416.67 Monthly HOI $ 75.00 Monthly PMI $ 126.00 Total Monthly Payment $ 3,297.49 2/1 Buydown Monthly Difference Yearly Difference Credits Needed 1st year Payment $ 2,790.36 $ 507.13 $ 6,085.56 $ 9,196.08 2nd year Payment $ 3,038.28 $ 259.21 $ 3,110.52 *In this example, with a $12k credit, you have a little less than $3k remaining to help cover your closing costs.