If you’re trying to get a lower mortgage rate, you may want to work with a lender that offers buydowns.
Borrowers can get a lower interest rate by purchasing mortgage points, which then reduce the rate by a certain percentage either temporarily or for the life of the loan.
Here’s how you can buy down your mortgage rate, the types of buydowns available and which borrowers would benefit from a buydown.
Online mortgage lenders can often help homebuyers with lower interest rates and faster closing times
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5% for conventional loans, 3.5% for FHA loans, 0% for VA loans, 10.01% for jumbo loan
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Mortgage buydown: Pros and cons
Pros
- Lower monthly mortgage payments
- Borrowers can qualify for a larger loan
- You may be able to deduct the cost of mortgage points
Cons
- Increased closing costs
- Temporary buydown means bigger payments later
- Not all lenders offer mortgage points.
How do you buy down an interest rate?
You can buy down your mortgage rate when purchasing or refinancing a primary or second home.
There are two main types of buydowns: mortgage points and temporary buydowns. They differ in who typically pays and how long the discounted interest rate stays in effect. Here’s how the two types work:
Mortgage points
With a mortgage point, also called a discount point, you can lower your interest rate over the life of the loan.
A lender may allow borrowers to purchase as little as a fraction of a point or as many as four points. One mortgage point typically costs 1% of your loan amount and permanently lowers your interest rate by about 0.25%. For example, if you took out a $150,000 mortgage, one point would cost $1,500 and get you a 0.25% discount, which would come to $375.
While that formula is common, the specific cost and the number of points you can purchase varies by lender.
Temporary buydowns
With a temporary buydown, your interest rate decreases for a set period and then increases each year after until it returns to its original level.
It is typically paid for by a lender, seller or homebuilder to incentivize a buyer.
1-0 buydown
In this situation, the interest rate would drop 1% for the first year of the loan, then revert to the original rate in the second year.
2-1 buydown
In a 2-1 buydown, the interest rate is slashed by 2% in the first year, 1% in the second year and then returns to normal in the third.
Here’s what a $350,000 loan with 6.25% interest would look like with a 2-1 buydown:
Mortgage rate buydown example
| Interest rate | Monthly payment | Monthly savings | Yearly savings | |
|---|---|---|---|---|
| Year 1 | 4.25% | $1,722 | $433 | $5,196 |
| Year 2 | 5.25% | $1,933 | $222 | $2,664 |
| Year 3 | 6.25% | $2,155 | $0 | $0 |
3-2-1 buydown
A 3-2-1 buydown would see your interest drop 3% in the first year, 2% in the second year and 1% in the third year, before returning to the original mortgage rate. This would offer the most significant reduction, so you need to be sure you can afford payments when the buydown period ends.
Which lenders offer mortgage buydowns?
Not all lenders offer mortgage buydowns and terms can vary between companies. Additionally, you still need to qualify for the home loan based on the full interest rate.
Rocket Mortgage offers 30-year fixed, jumbo, VA and FHA loans with two or more discount points available.
Rocket Mortgage
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages are available.
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Types of loans
Conventional loans, FHA loans, VA loans, Jumbo loans, low-down-payment mortgages
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Terms
10-, 15- and 30-year fixed-term conventional loans, 30-year VA and FHA loans, custom mortgages with fixed-rate terms from 8 to 29 years.
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Credit needed
620 for conventional loans
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Minimum down payment
0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
Bank of America offers points on 15-year, 20-year and 30-year fixed mortgages, as well as adjustable-rate mortgages with 5-year, 7-year and 10-year initial terms. Borrowers who meet income requirements can qualify for the America’s Home Grant® program, which provides up to $7,500 to permanently buy down your interest rate.
Bank of America Home Mortgage Loans
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, FHA loans, VA loans, Affordable Loan Solution® mortgage, Doctor loans
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Terms
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Credit needed
Conventional loans typically require a 620 credit score
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Minimum down payment
3% with Bank of America’s Affordable Loan Solution® mortgage loan
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Offers first-time homebuyer assistance?
SoFi, an online-only lender, offers fixed-rate conventional loans with 10-year, 15-year, 20-year and 30-year terms and ARMs with 5-year, 7-year and 10-year initial periods. It also issues government-backed FHA and VA loans and jumbo loans up to $3 million.
SoFi
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
VA loan, FHA loan, conventional loan, fixed-rate loan, adjustable-rate loan, jumbo loan, HELOCS & Closed End Second Mortgages
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Terms
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Credit needed
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Minimum down payment
Who is a mortgage buydown good for?
A mortgage rate buydown works best if you meet most of these categories:
A borrower with a fixed-rate mortgage
Adjustable-rate mortgages are typically only eligible for buydowns if the initial interest-rate period is at least three years. There are also restrictions on FHA loans and other government-backed mortgages.
A borrower who plans to live in their home for a long time
A buydown could save you a lot in the long term, but it’ll take time to make back that initial investment: If you took out a $300,000 mortgage with a 7% interest rate and bought four points, your interest would drop to 6% but it would cost you $12,000.
While you’d save $1,000 a year in interest payments, you would have to stay in your house for more than 12 years to reach your break-even point.
The Mortgage Research Center’s online calculator can show you how many months it will take for the points to pay for themselves, as well as what your monthly mortgage payment will be and the net interest you’ll save.
A borrower who can’t refinance
Refinancing depends on the type of mortgage you have and your home equity. For conventional loans, you typically get the best rates if you have 20% equity.
There are refinancing programs with Freddie Mac and Fannie Mae that guarantee a 0.50% interest rate reduction. There are also streamlined refinancing options for both FHA and VA loans.
A borrower who can’t get a better rate elsewhere
Before you look at any buydowns, make sure the starting rate is a good deal by comparing loan offers from multiple lenders.
FAQs
What is a mortgage buydown?
A buydown is a way to temporarily or permanently lower your interest rate with more money upfront. A borrower may purchase points, which lower the interest rate by a certain percentage. In other cases, the lender or seller will pay for a temporary buydown to help close the deal.
How much do mortgage points cost?
Typically, one mortgage point costs 1% of your total home loan, though it can depend on the loan and lender
What is a 2-1 buydown?
This is a temporary buydown in which the interest rate drops by 2% in the first year of the loan, then the discount drops to 1% in the second year. In the third year of the mortgage, the rate returns to normal.
How much can you buy down a mortgage rate?
If you are buying mortgage points, each point typically reduces your mortgage rate by 0.25%. Lenders may allow you to buy as many as four points, which would lower your interest rate by 1%.
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