Fluctuating interest rates have many would-be homebuyers wondering whether to start shopping for their new home or wait until things settle down.
There is no one-size-fits-all answer to that question. But if your finances and credit are in a good place, there are options available that will help keep your mortgage payment affordable while you wait for interest rates to drop again.
One of these options, a temporary buydown mortgage, uses funds deposited into escrow upfront to temporarily reduce your interest rate, which lowers your monthly mortgage payments. This is a great option when interest rates are high but expected to decrease or when a buyer anticipates having more money for their mortgage payments in a couple of years.
To help you decide whether a temporary buydown mortgage is right for you, we put together a list of common questions borrowers ask about the program.
Top 10 FAQs about Temporary Buydown Mortgages
What are the benefits of a temporary buydown?
A temporary interest rate buydown lowers your mortgage payment for the first one, two, or three years of the loan. This allows you to buy when interest rates are high but have lower mortgage payments while the buydown is active. You can refinance after the buydown period if interest rates have dropped; otherwise, you will start paying your mortgage at the original interest rate.
Who can fund the buydown?
Buydown funds—the lump sum that is deposited into escrow—can be provided by a variety of sources, including the borrower, the lender, the builder, the borrower’s employer, the property seller, or a third party with an interest in the transaction.
What is the difference between a 3-2-1 buydown and a 2-1 buydown?
A 3-2-1 buydown reduces your interest rate in years one, two, and three to 3 percent, 2 percent, and 1 percent below the permanent rate on the loan, respectively.
A 2-1 program reduces interest rates 2 percent below the permanent interest rate in year one, then 1 percent below the permanent interest rate in year two.
In both instances, once the buydown period ends, you will pay the permanent interest rate for the remainder of the loan.
What types of home loans are eligible for temporary buydown?
Temporary interest rate buydowns are allowed on conventional home loans, government-backed loans (such as FHA or VA loans), and certain adjustable-rate mortgages. These loans can be used for primary residences or second homes as long as the rate reduction does not exceed 3 percent of the permanent rate and the rate increase will not exceed 1 percent per year.
Do I have to put more money down on a temporary buydown mortgage?
No. Temporary interest rate buydowns don’t require a larger down payment. In fact, depending on the type of mortgage you qualify for, you can put as little as 3 percent down.
How long can a buydown last?
Temporary interest rate buydowns must last a minimum of one year and can’t run longer than three years, depending on the type of buydown program you use.
How much will a buydown reduce my monthly payment?
Reductions depend on a few factors, including the temporary buydown period, the permanent interest rate, and the loan amount.
What happens if I sell the house or go into foreclosure during the buydown period?
Before the sale or foreclosure is finalized, any remaining buydown funds in escrow will be applied toward the principal, not refunded.
What is the difference between a temporary buydown and an ARM?
The interest rate on a temporary buydown mortgage is permanent, meaning it is fixed for the entire period of your loan. Payments are temporarily lower due to the upfront funds placed in escrow, not a change in interest rate.
The interest rate on an adjustable-rate mortgage (ARM) is variable after the introductory period and may increase or decrease over the life of the loan.
What is the difference between a temporary buydown and a permanent buydown?
Temporary buydowns lower the interest rate for a specified time period. When the period ends, the buyer pays the original rate for the remainder of the loan.
Permanent buydowns allow buyers to lower their interest rate for the life of the loan by paying a percentage of the loan amount upfront. This is also known as buying “points.”
Know Your Mortgage Options
There is no one-size-fits-all mortgage, so it’s up to you to know what your home loan options are.
Working with an experienced lender like FFB Mortgage Lenders will give you the knowledge you need to make an informed decision about which mortgage is right for you—and whether a program like temporary interest rate buydown will put homeownership within reach.
Download The Essential Checklist for First-Time Homebuyers for fast answers to common questions about navigating the homebuying process.
About the Author
First Federal Bank Mortgage Lenders
We’re honored to be your partner in the homebuying process. And like any good relationship, it helps to know who you’re working with. A home is the most important purchase we can make in a lifetime. At FFB, we’re built to deliver exceptional customer service from your first call to your closing day and beyond. First Federal Bank has helped families find the right loan to fit their needs for decades.