Mortgage Minute - Temporary Buy Downs

Last month I wrote on the availability of buying down the rate where the borrower pays an upfront fee to have the rate reduced for the life of the loan. There is another option when buying down the rate that is called a temporary buy down. The most common option is a 2-1 buy down.

With a 2-1 buy down, the interest rate is 2% less than the regular rate for the first year and 1% less than the regular rate in the second year. Then, in the third year, the rate changes to the regular or permanent rate (known as the Note Rate) for the remaining term of the loan. For instance, let’s say that the current interest rate (Note Rate) is 6.50%. With a 2-1 buy down, your rate for the first year of your loan would be 4.50%, the second year your rate would be 5.50%, and then, starting in year three, 6.50% for the remaining life of the loan.

With a 2-1 buy down, the fee for buying down the rate is typically paid for by the seller via seller contributions as a way to provide an incentive to attract potential buyers. The fee is derived from the difference in interest that would normally be paid had the Note Rate been in effect the first two years.

Qualification on these types of loans is still based on the Note Rate, however, during the first two years your payments will be lower since they are based on a lower rate. Having these lower payments for the first two years provides the home buyer with a way to ease into their regular monthly payments. This can be especially beneficial for someone just starting out in their field of work, expecting pay raises, or expecting other debts to be paid off.

Since not all lenders or loan programs offer temporary buy down options, please talk with your lender for details regarding their availability.

Michael Scharfe has been a lender at First Security Bank for nine years. Reach him at [email protected].