There’s no “one size fits all”.

Not for career aspirations, planning a vacation, or eating an oreo.

And definitely not for buying a house.

That’s why you have so many options on how to get to your end goal.

…Different loan programs (VA, USDA, FHA, Conventional, etc.)

…Various down payment assistance programs

…Different types, pricing, and locations for housing itself

All to give you options so you can find what works best for YOUR situation… including your dreams, preferences, and budget.

One option that’s available… and sometimes the right fit for homebuyers, buydowns.

Before your eyes completely glaze over… have you ever bought toilet paper?

Talk about options!!!

You can go to your local corner grocery store and get a 6 pack of TP for $10.49, that’s $1.75 per roll.

Or, if you buy in bulk - you can get 36 rolls of the same toilet paper for $31.99, or $0.89 per roll.

You can pay less up front - but the cost-per-roll is higher.

OR

At the bulk store - you’re paying more upfront - but it’s less per roll.

Back to buy downs… the thing you’re buying down? Interest rates.

Again, you have options. You can do a temporary buydown or a full term buydown.

Let’s talk about temporary buydowns, first.

With a 2:1 buydown, you’re asking for a short-term lower interest rate.

Generally it’s 2% lower for one year, 1% lower the second year, and then the “regular” rate for the third year and going forward.

So if your interest rate was 6%, you could “buy down” the rate temporarily so it’s 4% for one year , 5% the second year, and 6% after that.

(Fun fact, a temporary buy down is a seller concession, which means the home seller pays for the buydown savings.)

Let’s look at some hypothetical numbers:

Say you’re purchasing a home with a loan amount of $200,000. A 6% fixed rate for a 30 year mortgage would be $1,200/month (principal and interest).

With a temporary 2:1 buydown, interest rate for year one would be 4%, saving $244/month.

Year two, interest rate goes to 5%, which is a $125/month savings.

And then year three and beyond the interest rate levels out at 6% and the full $1,200/month payment.

The savings for the buyer over the first two years is $4,440 (which, again is paid by the seller up front.)

If you’re looking at buying a house that seems a bit out of range today, but you have a strong likelihood of being able to afford it within a couple of years… temporary buydown options might be a good fit for you.

This works well for people who are budget-conscious during the initial years of homeownership or have a likelihood for income growth in the near future:

… yearly promotions or bonuses

… daycare expense dropping

… car loans getting paid off

Something to keep in mind.

Now, let’s chat permanent buydown options.

This is when you pay more upfront (up to 2% of your loan value), for a lower interest rate for the life of the loan.

This is an especially good option for homebuyers who anticipate a future refinance and don’t want to deal with all the extra paperwork, or for those who plan on staying in that house - with that mortgage - for the long haul.

Going back to the toilet paper…

The financial benefit of paying more up front (but less per roll) comes when you use all 36 rolls. If you only use 10 rolls, and throw the others away… well, you would have been better off (financially) going down to your local grocery store to buy some smaller packs.

Like bulk toilet paper, buydowns make the most sense when you’re able to use up enough of the product (years on your mortgage) to fully appreciate the lower interest rate.

Let’s say you are going to buy a house at a $200,000 loan amount with a 6% interest rate. You choose to permanently buy down the rate to 5%, for an additional $4,000 at closing.

(Pause for a moment to reiterate… this is a completely made up scenario with simple numbers to hopefully help you better understand how buydowns can work in your favor.)

Back to our land of make-believe.

Before the buydown, the monthly payment for purchase price and interest rate ($200,000 @ 6% for 30 year fixed mortgage) would be $1,199.

With the buy down, paying an extra $4,000 at closing ($200,000 @ 5% for 30 year fixed mortgage) the monthly payment would be $1,073.

The difference between 6% interest and 5% interest in our completely made up scenario is $125 per month.

But you paid $4,000 up front to make it happen.

How long would it take for the extra upfront cost to balance out and break even?

32 months.

In just over two-and-a-half years you will equal out the additional $4,000, and you’ll be saving money for the next (potentially) 27.5 years of monthly payments. #worthit.

But what if this isn’t your forever home and you don’t keep the house (and the mortgage) for full 30 year term?

Selling the house (and thus entering into a new mortgage contract) at 2 years would mean losing money.

At 3-5 years… you’ll be saving a smaller amount of money and it’s up to you to decide if it’s worth the upfront costs.

But an extra $125 in your pocket every month for 7-10 years? Not too shabby.

Are buydowns for everyone? Absolutely not.

But, buydowns might be a good option for you if:

You are interested in buying a home now at a higher interest rate and are willing to refinance in a few years if rates go down.

You might want to consider a permanent buydown option now to ensure a lower interest rate from the beginning and save yourself the additional paperwork (and closing costs) in the future.

OR a temporary buydown might work for you if:

You have a toddler aged child now who will be going to school within a year, and $1,200 a month of daycare expenses will be able to get funneled towards a house payment.

If any of this sounds like an option that would help you reach your homeownership goals while staying in your budget… it’s worth it to ask your local mortgage lender about your options.

Talk with a mortgage lender and specifically ask what buydown options would be available to you, and what that would look like for your budget.

If you’re a prospective homebuyer looking at houses in Iowa, Nebraska, or South Dakota, we would LOVE the opportunity to chat with you about your options.

You deserve a mortgage you understand, are comfortable with, and can afford.
We love to help make it happen.

–Team Chedester Licensed Mortgage Originators

Buydowns: Temporary 2:1, Permanent, and more!