A rate buydown is a financing option where the buyer or seller pays an additional fee in order to lower the interest rate on a mortgage. For example, if the current market interest rate is 5%, a buyer might pay a fee to buy down the rate to 4.5%. This can make the monthly mortgage payments more affordable for the buyer. Rate buydowns are typically used in situations where the buyer cannot qualify for a lower interest rate through traditional means, such as a good credit score or a large down payment.
In this current market at the time of writing, as sellers struggle to move their homes quickly and rates are rising. It may be advantageous to buyers to request assistance with a rate buydown versus just closing costs. Even a savings of half percent to one full percent can make major savings for your monthly mortgage payment.
There are various types of rate buydowns, permanent or temporary. You’ll have to check with your lender to see what’s available and what will work best for your situation. A permanent buydown may be more costly and less effective. Whereas a temporary buydown can give significant savings in the first few years. An example is a 2-1 buydown, the first year will save 2% on the base rate, the second year will save 1%, and the third year the rate will shift back to the base rate. This may give a buyer enough time to wait for rates to fall down and then refinance.