Can temporary buydowns help you afford a home?
If you’re looking to buy a home but current mortgage rates are higher than you hoped, or you’re expecting a raise or bonus in the nearby future, a temporary buydown may help you get moved in quicker. With a temporary buydown, you can afford a home and take advantage of special financing that temporarily reduces your mortgage interest rate. With the benefit of a lower interest rate, you might find yourself with more cash available for a specific and predictable timeframe.
The convenience of a lower monthly payment can be a huge plus if you want to save on initial costs. It’s important to understand the length of your buydown’s option and what you can expect afterwards. Keep reading to discover if a temporary buydown may be a good choice for your financial situation.
What are temporary buydowns?
Temporary buydowns are special financing plans that lower your initial mortgage payment by reducing the interest rate for a set period of time. How long these interest rate reductions last will depend on the option you choose.
The buydown period will eventually end, after which you’ll start paying the full note rate on your mortgage.
How do temporary buydowns work?
Temporary buydowns are funded through a buydown escrow account with the servicing lender, either by yourself, the seller, lender, or homebuilder. The money in the buydown account is used to pay for the interest rate difference with each payment made. Sellers or homebuilders sometimes offer to pay the buydown as an incentive to sell the home.
You’ll know when your payments will increase, as this depends on the type of temporary buydown you chose.
If you wanted to completely renegotiate the terms of your mortgage, a refinance would be the best option for you. Temporary buydowns are only for initial home purchases, reserved for primary residences and second homes.
Who would benefit from temporary buydowns?
You could benefit greatly from temporary buydowns if you expect an income increase in the next few years, or if you want to keep your options open during the home search. Because buydowns lower interest rates at the beginning of a mortgage, they make homeownership more accessible, especially if you’ve found the home of your dreams and want it as soon as possible or just want some extra money for renovations and design updates.
Are there different types of temporary buydowns?
Guild offers a variety of buydown options that lower your mortgage rate for up to three years.
| If you want to... | Your best term rate is... |
|---|---|
| Bring down your rate 1% for the first year | 1-year buydown (1-0) |
| Reduce your rate by 2% the first year and 1% the second year or Simply lower your first two years by 1% |
2-year buydown (2-1 or 1-1) |
| Take advantage of 3 years of buydowns, with 3% the first year, 2% the second, and 1% the last | 3-year buydown (3-2-1) |
Can temporary buydowns be used with any kind of loan?
Temporary buydowns can be added to most loan programs, including Conventional, FHA, VA and USDA. Jumbo loans are also eligible for buydowns, for up to two years.
Guild offers a couple of loan programs that have buydowns built into them. With Payment Advantage, we pay 1% of your interest rate for your first year with a Conventional loan. Afterwards, you could be eligible for refinancing through the Payment Protection program with zero lender fees. The Payment Advantage Plus program works similarly, except the seller or builder would pay 2% of your rate for the first year and we’d pay 1% for the second year.
How much would I save?
Your savings will depend on your temporary buydown type, loan term, interest rate, the amount of money you’re borrowing, and whether you’re paying for the buydown yourself or if it’s through another party. Our temporary buydown calculator can help you see how these different factors can change your monthly payments, and you’ll be able to predict your annual and monthly savings.
Overall, if you expect to have more income in the next few years, or if you just want some extra cash on hand when you move into a home, a temporary buydown may be an option for you. Saving on interest rates during the first few years of your mortgage can provide the financial cushion you need for home improvements or general savings. Connect with one of our loan officers to learn what’s best for your goals.
The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.