What Is Buydown: Definition and Types of Mortgage Buydowns

Buying a home is one of the most expensive, life-altering decisions a person can make. Not only are you gaining a substantial asset, but you are also taking on the weight of a monthly mortgage payment. Instead of hoping and praying for a low interest rate, you can put more money down upfront to ensure that a lower interest rate becomes a reality. This is a mortgage buydown. 

What Is a Buydown?

A buydown is an option for homebuyers who want to obtain a lower interest rate by paying “discount points” at closing time. These discount points are also called mortgage points or prepaid interest points, and they simply refer to the one-time fee you (the buyer) pay upfront. 

These points you purchase upfront upon closing will reduce your interest rate for the first few years of your home loan. By putting down more money upfront, you are guaranteeing a lower monthly payment even if interest rates were to hike. 

Types of Buydowns

Before you start the mortgage buydown process, keep these three types of buydowns in mind. 

Permanent 

As the name implies, a permanent buydown on your mortgage does not have a fixed time period. The interest rate discount applies over the entire length of their loan. 

Temporary 3-2-1

A 3-2-1 mortgage buydown gives the homebuyer the ability to pay a low interest rate for the first three years of their loan. The rate rises by 1% each year until the fourth year, when it returns to the original undiscounted interest rate.

Temporary 2-1

Similar to a 3-2-1 buydown, the temporary 2-1 buydown applies for the first two years of their loan. After two years, your interest rate returns to its original undiscounted value. 

 

Conclusion 

A buydown on your mortgage will allow you to lower your monthly payment. However, not every homeowner is the right fit for a buydown. We recommend talking to a mortgage professional about your options. If you need help, Legacy Homes of Alabama can help point you to the right resources.