Preparing for the Buydown Interest Rate.
Don’t let the buydown interest rate process stump you – find out how to make informed decisions with this beginner’s guide! Benefits for both buyers and sellers.
If you’re looking to purchase a home, it’s important to understand the buydown interest rate process. This beginner’s guide will explain the basics of buydown interest and provide tips to help you make informed decisions.
What is the Buydown Interest Rate?
Buydown interest is when the initial interest rate on a mortgage loan is lower than the actual rate agreed to by both parties. This allows you to pay a lower monthly payment throughout the period of the buydown. Buydowns can be funded by the seller and are often used as an incentive for buyers to purchase a home. It’s important to understand how buydown interest rates work and what options are available before making any decisions.
Understand How 2 1 Buydown Interest Rates Work – Example.
Let’s review the example for the Breckenridge and Summit County area in Colorado that is offered by one of my lenders. Please, contact me if you would like the referral to this lender.
If you are purchasing a primary residence the loan amount must be less than or equal to $726,200 and as of today, the fixed rate for a period of 30 years would be 6.50%. The example below is presented on a $500,000 loan price. The buydown payment option is great.
How Do You Calculate Buydown Interest Rate?
| 2-1 Buydown Interest Rate | |||||
| Temp Interest rate | Actual Payment | Buydown Payment | Monthly Subsidy BUYER MONTHLY SAVINGS |
Nr of Payments | Annual Subsidy Payments BUYERS ANNUAL SAVINGS |
| 4.5% | $3,160.34 | $2,533.43 | $626.91 | 12 | $7,522. 96 |
| 5.5% | $3,160.34 | $2,838.95 | $321.40 | 12 | $3,856.74 |
| 2-1 Buydown Total Cost (Paid by the seller) | $11,379.70 |
Paying the buydown interest rate will allow for your rate to drop to 4.5% in the first year of your mortgage, followed by 5.5% in your second year of the mortgage. The remaining 28 years will have a locked rate of 6.50%, but at that time if the rates drop, then you will have the option to refinance. What is great about refinancing, is that you, as a buyer, would receive a credit towards the payoff amount for the prorated $11K for any amount remaining.
Is it Worth to do Buydown Interest Rate?
Yes! This is a great negotiation tool for the buyers and a great incentive that can be offered/accepted by the sellers. As you are shopping for a new property, ask your agent to include the verbiage about the seller to pay for the 2 1 buydown interest rate. As the market is shifting, the sellers are more motivated to negotiate that with the buyers. It is a better option for you as the buyer, because it enables you to save a lot of money. Over the course of two years, a lot can change in the market, and there is a good chance that the interest rate will go down by that time and you can refinance. What is also important to know, is that none of the funds are lost and you will receive a credit when you opt in to refinance.
On the other hand, you may ask – what if the interest rates don’t drop? Great question! Your interest rate, as in the above example at 6.50% is locked for the remaining 28 years, so you can enjoy ownership of the home, while it would cost you more to purchase at that time instead.
And for you seller, it is a great incentive to offer to potential buyers. If your home sits on the market for a long time and you have no activity on your property, this may be a smarter strategy to attract more buyers, than offering a lower purchase price.
How is 3 2 1 Buydown Interest Different than 2 1?
What if I would like to purchase a second home?
If you are purchasing a second home in Breckenridge and Summit County, Co area then the loan amount must be between $726,200 and $953,350 and the rate as of today is 6.99%. The maximum loan amount is $953,350. Buydowns are not available on Jumbo loans.
Determine Your Available Credit and Budgeting Limits.
Before deciding to accept a buydown interest rate, you should know how much credit and budgeting space you have available. As part of the qualifying process, your lender will provide you with an estimated loan amount and maximum monthly payment that are based on your current financial situation. Calculate this figure against your available credit and total budget in order to determine if the set payments included in a buydown agreement is something that won’t exceed your existing limits.
Know All Fees You May Be Paying With a Buydown Interest Rate.
In addition to the payouts for points and other fees, make sure to research any applicable fees must be paid when agreeing to a buydown interest rate. These typically cover costs like closing fees and miscellaneous administrative expenses that your lender requires you to pay out of pocket. To keep track of all the fees associated with a loan, review the preliminary disclosure form or HUD-1 Settlement Statement – both of which provide an itemized list of required payments.
What programs are Available for Buydown Interest Rate?
What programs are Not Eligible for Buydown Interest Rate?
Are you looking to purchase a primary residence or second home in Breckenridge and Summit County, Colorado area?
I’m passionate about serving the Breckenridge and Summit County, Co community and I am looking forward to helping you with your home-buying needs. Please, contact me via this website.
In the meantime, search this website for homes for sale in Breckenridge and Summit County, Co area.
