What you should know about interest rate buydowns.

The Ultimate Guide To Interest Rate Buydowns: Why You Should Know About Them

It’s a tool to help you qualify for a larger loan and purchase a higher-priced house than you could under normal circumstances. A buydown allows you to pay extra points upfront in return for a lower interest rate for the first few years. The good news: the extra points are tax-deductible. Often, people relocating for employment obtain buydowns because employers often pay the extra points as part of a relocation package. Buydowns are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan.

What is a buydown?

A buydown is a benefit to someone who makes a purchase. For example, if you purchase a new vehicle, you can apply for a buydown so that your monthly payments are smaller, even if you owe more than the vehicle is worth. The idea is that you use the buydown to pay down the principal amount and shorten the term of the loan. Why would you use a buydown? People who have a hard time qualifying for a loan to begin with can use buydowns. But for people who are approved for the loan, this isn’t always the best option. Here are some reasons you may want to avoid buydowns. Gross income requirements Buydowns are often based on gross income. The first part of the year is when you report your income, and the second part of the year is when you pay income taxes.

Why would you want one?

This is a much-needed tool for people who often have bad credit or other imperfect credit scores. Many people are denied a mortgage or insurance rate due to their credit profile. A buydown can help the person qualify for a mortgage or to buy a house with a lower interest rate. In essence, the buydown is like lowering the interest rate of the loan. If the buyer wants a higher interest rate after the first few years, the home will cost them an extra 3% per year.

How do you get one?

With loan programs like FHA and VA, the borrower can apply for a loan with a 20% down payment. The required down payment is usually in the form of private mortgage insurance (PMI). PMI protects the lender in case you default on your loan. FHA does not require a PMI for high-interest-rate loans, however. You can also get a $3,000 PMI with a Federal Housing Authority (FHA) loan. An FHA loan also has lower points requirements and other benefits, including no PMI requirement, as long as you start with a 10% down payment. Because FHA loans do not require a PMI, they allow a borrower to save thousands of dollars on their monthly mortgage payments. VA loans, on the other hand, require the borrower to put 10% down.

How does it work out in the long run?

Most importantly, the loan gets paid down at a faster pace. Most buyers who take advantage of a buydown see their monthly payment reduced by 50% or more. They typically have the lowest monthly payment during the first few years of their loan, so the lender can make more money off of the loan. Depending on the property, you might be able to save a lot more by using a buydown than simply getting a traditional mortgage. As the owner, you’re not charged property taxes, insurance, or homeowners association dues, which often make up the difference between a buydown and a mortgage payment. Furthermore, you avoid those homeowners association fees. You’re probably wondering how an owner-renter gets out from under the cost of these maintenance fees.


Because there are many different options out there, I recommend you go through the pros and cons of each one to figure out the best option for your circumstances. However, these three are probably the most common, and for the average buyer, the most accessible. 

March 5, 2022

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