A 1% difference in mortgage rate might seem insignificant, but it can add thousands to the total cost of a loan and increase a monthly payment by as much as $100. For some borrowers, 1% can have a huge impact on affordability.
However, rate increases don’t have to keep you on the sidelines. If you want to buy now — and you anticipate earning a higher income in a few years — a temporary buydown can help you get a lower mortgage payment.
How Does a Buydown Program Work?
When mortgage rates increase, so does the cost to borrow money. And unfortunately, higher rates also decrease a borrower’s purchasing power.
With a temporary buydown, FirstBank Mortgage reduces the mortgage rate on your loan for the first two or three years. The original rate doesn’t kick in until year three or four, so you’re able to enjoy smaller initial payments. Therefore, this program keeps homeownership within reach as interest rates increase. It’s important to note that temporary buydowns aren’t one-size-fits-all.
FirstBank Mortgage offers two buydown options:
• 2/1 Buydown: You receive a rate reduction of 2% in the first year and 1% in the second year. The original rate starts in year three. Available with conventional, VA and FHA loans.
• 3/2/1 Buydown: You receive a rate reduction of 3% in the first year, 2% in the second year, and 1% percent in the third year. The original rate starts in year four. Available with conventional and VA loans.
To illustrate how this works, let’s say you have a 2/1 buydown and an original interest rate of 6%.
In this scenario, you’ll pay 4% in the first year and 5% in the second year. If you have a 30-year fixed-rate loan for $300,000, a 2% reduction saves over $300 a month. You can use this savings to replenish your cash reserve, pay off debt or even renovate your new home.
As a warning, though, this savings is temporary. Your monthly payment will increase once the buydown expires. With that being said, a buydown only makes sense when you’re able to afford a future higher payment — so plan accordingly.
Benefits of a Temporary Buydown
Since buydowns are a seller concession, you don’t pay the costs associated with this program. This is a seller-paid incentive covered by home sellers or builders, so you’ll need to ask for the buydown when negotiating the home sale.
If the seller agrees to a temporary buydown, they’ll pay your lender the difference between your original mortgage rate and the reduced rate. Buydowns are generally the most cost-effective alternative for sellers, resulting in a bigger net profit compared to reducing their asking price.
Keep in mind that mortgage rates are very unpredictable, and they can increase and decrease from year-to-year. Therefore, average rates once your buydown expires might be lower than your original rate. And if so, you’d have to refinance to take advantage of lower rates.
Refinancing involves replacing an existing mortgage with a new one, and unfortunately this has its own set of costs. The good news, though, is that both buydown programs with FirstBank Mortgage are eligible for FirstBank’s Zero Lender Fees Refinance Loyalty Program. If mortgage rates decrease within 36 months of your purchase, you can refinance to a lower rate and pay zero lender fees.