Temporary Buy Downs: What Are They, And How Do They Work?

Temporary Buy Downs: What Are They, And How Do They Work?

Leverage Lending Group
Leverage Lending Group
Published on January 18, 2023

Temporary Buy Downs: What Are They, And How Do They Work?

Temporary buydowns help homebuyers lower their interest rate temporarily. In addition, it makes buying a home more affordable and the transition from rent to a mortgage less shocking for new homebuyers.

What is a Temporary Buydown?

A temporary buydown is a lump sum someone involved in the purchase transaction pays to temporarily lower the buyer's interest rate. Called the 2-1 buydown, the lump sum pays down the interest rate for the first two years.

In the first year, the rate is 2% lower than the quoted rate, and in the second year, it's 1% lower. Finally, in the third year, the buyer pays the normal rate the lender quoted.

The payments are calculated based on the quoted interest rate, but the lump sum payment pays the difference between the bought-down rate and the quoted rate.

Are Temporary Buydowns the Same as Discount Points?

Discount points are another way to lower the buyer's interest rate, but there's one significant difference.

Discount points buy the rate down for the life of the loan, and 2-1 buydowns are temporary, only for the first two years.

Another difference is the amount buyers save between the two. Temporary buydowns are much more drastic, dropping the rate by 2% and then 1%. Discount points buy the rate down 1/8th of a point for every one point paid typically.

Who Pays for Temporary Buydowns?

Anyone can pay for the temporary buydown, but buyers typically don't, as it would defeat the purpose.

Instead, sellers, builders, or even lenders pay the buydown. Most commonly, though, sellers pay them to make buying their home more enticing. More sellers are offering this concession as interest rates rise to encourage people to buy their homes.

Why Buyers Want a Temporary Buydown

Besides the obvious, saving money for two years, temporary buydowns can help first-time buyers ease into their mortgage payments. The payment shock from rent to mortgages can be high, but the buydown temporarily lowers mortgage payments, allowing borrowers to slowly get used to the higher payments.

Buyers can also use the lower payments to replenish their savings after making a down payment and covering their closing costs.

Qualifying for a 2-1 Buydown

It's important to understand that borrowers must qualify at the regular rate for their mortgage. So even though the initial payment is lower, they must prove they can afford the full payment to get approval.

To do this, borrowers must provide income, asset, and liability information to prove their debt-to-income ratio, credit score, and income are good enough to qualify for the rate.

Final Thoughts

Temporary buydowns are much more popular today than in recent years and are a great way to buy the home you want. Buyers or sellers can initiate the negotiations for a buydown, and the lender has the final say in how much sellers can contribute to the buydown to keep the transaction fair for all parties.

If you have any questions or would like additional information, please contact Angelo at angelo@lendwithleverage.com; 704-248-8742.

Leverage Lending Group
Leverage Lending Group
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(704) 631-9276

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