As higher mortgage rates cut into homebuyers' purchasing power, a renewed interest in mortgage products like temporary buydowns is beginning to emerge. Buydowns were widely utilized in the late 1970s and 1980s when interest rates were surging. While there are many ways borrowers can manage higher costs associated with rising home prices and rates, temporary buydowns are gaining in popularity once again.

A temporary buydown is essentially a cash payment that reduces the borrower’s interest rate for a limited period of time, which allows for a lower monthly mortgage payment. A buydown can be paid by the buyer, seller, lender or builder, although buyers don’t typically cover the costs. More frequently, it is used as an incentive to get homebuyers concerned about high interest rates to the closing table. 

Borrowers can think of a buydown as a temporary form of subsidizing a portion of their monthly mortgage payments. Sometimes, a buydown is all it takes for the borrower to be able to afford renovations or upgrades on a house that otherwise checks all the boxes. For example, let’s say  a borrower takes out a $500,000 loan at a 7% interest rate with a one-year buydown. Because of the buydown, the rate goes down by 1% for one year before rising back thereafter. In this scenario, the monthly mortgage payment would be reduced to $2,998 from $3,327, saving the borrower a total of $329 each month.

Builders in particular will often use temporary buydowns instead of cutting list prices to entice buyers. Price cuts can have some unwanted effects such as buyers who signed contracts at higher prices before the cut backing out of the deal and increased pressure on the value of comparable properties in the area. 

It is important that buyers understand that buydowns are a temporary tool that may only extend from one to three years into the loan term. Folks who plan to own a home for a significant length of time may benefit more from paying discount points for the loan, which lowers monthly payment over the life of the loan. 

When you are ready to purchase a home, please reach out so we can discuss your expected rate and the best time to lock it in. Please call me today to set up an appointment.