Most of the time, mortgage borrowers have the option to save money by buying down their mortgage, either permanently or temporarily. Although mortgage buydowns can help many homeowners, each borrower should determine whether a mortgage buydown is appropriate for their situation by reviewing the pros and cons.
One of the most common mortgage buydowns is a temporary subsidy buydown mortgage, which we explore in detail with this article.
In general, a mortgage buydown lowers your monthly payment by buying points (also known as “discount points”) in exchange for a lower interest rate.
Depending on the transaction, the lender may offer a 0.25% interest rate reduction on the first point you buy (a point is 1% of the home’s purchase price).
On a $200,000 mortgage, you could pay $2,000 to reduce your interest rate .25%. If, for example, buying a point lowered your interest rate from 4.25% to 4.00%, you would save a little over $10,000 in interest on a 30-year fixed rate mortgage.
Temporary Subsidy Buydown Mortgage
A temporary subsidy buydown mortgage helps buyers by lowering the interest rate at the beginning of the mortgage, then it remains at the full interest rate for the remaining term of the loan. Temporary subsidy buydown mortgages are especially helpful for homebuyers who have higher earning potential in the near term, and only need the monthly payment lowered for the first few years.
With a temporary buydown mortgage, points are paid to prefund an escrow account. The escrow funds are used to subsidize the mortgage’s initial monthly payments.
The 3-2-1 buydown mortgage is one of the most popular options for a temporary buydown. Points are paid to lower the interest rate over the first 3 years of the mortgage (3% for the first year, 2% for the second year, and 1% for the third year).
There are 3 sources from which points can be paid with a temporary buydown mortgage:
- Yourself. You pay for points to lower your interest rate.
- Builder or developer. A builder or developer may reduce the buyers mortgage payment with a 3-2-1 buydown mortgage, for example, in which the builder pays for points during the first 3 years of the mortgage (3% for the first year, 2% for the second year, and 1% for the third year).
- Seller. The seller pays points to lower the interest rate, which is built into the price of the home.
Sellers are occasionally willing to pay points for a temporary buydown mortgage to make their home more attractive to buyers, especially to buyers who would find the mortgage payment uncomfortable for the first few years.
Other popular temporary subsidy buydown mortgage include:
- 2-1 buydown mortgage, which lowers the mortgage payment 2% the first year, and 1% the second year.
- 1-0 buydown mortgage, which only lowers the mortgage payment 1% the first year.
Related: Permanent Buydown Mortgages
Marimark Mortgage is based in Tampa, Florida, and specializes in permanent buydown mortgages and temporary subsidy buydown mortgages.
We offer conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.