Interest Rate Buydowns
While you may have found a mortgage quote that suits
you, it is important to also understand additional ways
in which you can get the mortgage quote that works best
Interest rate buydowns are exactly as they sound. In
order for a buyer to secure a 2 to 1 buydown, they pay
three points above the current market points in order
to receive a below interest market rate for the first
two years of the mortgage loan. At the end of those
two years the buyers would they be responsible for paying
the old rate for the rest of the term.
For example, if the current market rate for a fixed
loan is 8.5 percent at a cost of 1.5 points, the buydown
provides the borrower a first year rate of 6.5 percent
and a second year of 7.5 percent and a third through
the 30th year at 8.5 percent and the cost would be 4.5
points. A transferring company usually covers buydowns
as a result of the high points associated with them.
Rather than charge higher points to the buyer in the
beginning of their loan, in today’s market, mortgage
companies have found a way to increase the note rate
to cover later years.
Another type of interest rate buydown is the 3-2-1
buydown, which is very similar to the 2 to 1 buydown;
except for the fact the starting interest rate is three
percent below the note rate. Another option is the flex-fixed
buydown where the rate increases at six-month intervals
rather than annual intervals.
Another example for a flex-fixed jumbo buydown at a
cost of 1.5 points would be an interest rate of 7.5
percent for the first six months. The second six months
the rate would be 8 percent, the next would be 8 percent,
the next would be 9 percent, and the next 9.50 percent
and the 37th month the rate would culminate at 9.875
percent and would remain that for the remainder of the
Many buyers will choose an interest rate buydown if
they are certain their income will grow in coming years.