Qualified Home Loans

Using a Temporary Buydown to Lower Housing Payments

Mortgage lenders are bringing back a loan program called a 2-1 buydown or temporary buydown. These programs have been around for a while but only get dusted off when rates have recently increased. The buydown is a way to lower interest rates and buyers’ mortgage payments for the short term. The seller or builder typically pays them.

What is a Temporary Buydown?

The “2-1” refers to how the temporary buydown steps up. A typical 30-year fixed rate is about 6.75% right now (11/2/22). A 2-1 buydown would have your principal and interest payments at 4.75% for the first 12 months and 5.75% for the second 12 months. You would repay the remaining 28 year term at the note rate of 6.75%. 

Suppose you were to calculate that on a $650,000 loan, that amounts to just shy of $15,000 in payment difference over the two years; $9,902 in the first year and $5,072 in the second year. A good question might be, where does that money come from? 

A reserve account is set aside with the lender for the total funds needed to cover the temporary buydown for the next two years. Those funds can come from several places: the seller, the agents, the lender, or even an employer. It would most likely be a seller or builder offering that subsidy. At closing, funds will be put into that account. The lender draws on it each month to lower the payment. If the loan is paid off early, the buyer receives the remaining balance. 

As a company rule, we typically don’t like to recommend short-term solutions that have increasing payments. However, buyers can leverage this loan structure to help ride out higher rates. It’s hard to know, but higher interest rates are considered transitory until inflation is controlled. In an ideal situation, a client can buy a home using a temporary buydown and then refinance into a lower permanent loan, presuming rates improve later. Any funds not used for payments would be refunded directly to the borrower.

Have more questions?

Contact us if you are interested in learning more about your mortgage options. Our Loan Officers are experts and can provide additional resources.