You may have heard the term interest rate buy-down floating around in the current real estate market. But, What is it and what does it mean?
A buy-down is a mortgage financing technique in which the buyer obtains a lower interest rate for the first few years of the mortgage. The party providing the buy-down funds will normally make a lump-sum payment into an escrow account at closing.
By paying extra cash at closing so their monthly payment is based on an interest rate that is typically 1 percent to 2 percent below the note rate. The first-year rate on a buy-down is often referred to as the “start rate.”
For example, the interest rate on a 2-1 buy-down would be 2 percent below the note rate for the first year and 1 percent below the note rate for the second. Then years three through 30 would be at the note rate.
The cost to temporarily buy down the interest rate will depend on the size of the mortgage loan and the amount and duration of the buy-down. The calculation used to buy down the rate may also differ among lenders but is usually about equal to what the borrower saves in interest. As an example, using the average mortgage ($415,000) with a 30-year term, a 2-1 buy-down would cost approximately $9,000 and a 3-2-1 buy-down would cost around $17,000.
The 2-1 buy-down program is a phenomenal way for buyers to ease into their new mortgage payment. This program also is a great way for buyers to get into a home sooner and benefit from price appreciation immediately, rather than waiting to buy in hope that rates drop in the future. If the buyer were to sell, refinance or pay off the mortgage before the end of the second year, the remaining escrow or buy-down funds are refunded to them or applied toward the payoff of their mortgage.
With current interest rate being slightly higher than we most are used to.
This is a great opportunity to purchase your dream home with this seller concession.