If you’ve never heard of a mortgage buydown, it’s worth learning about! A mortgage buydown reduces your financing costs by temporarily lowering the interest rate. This perk may be offered by Chicago area home builders, or other sellers, as a purchase incentive. According to Crain’s, about 68% of Midwest home builders are offering buydowns as an incentive to home buyers

Similar to mortgage “points,” a buydown is essentially pre-paid interest, but applied to a specific period of time. For example, a home builder might offer a 3-2-1 buydown on certain models. In this situation, your interest rate, and corresponding mortgage payments, would be reduced for the first three years of home ownership. With a “3-2-1,” the sharpest rate reduction applies to the first year, (3%) then a lesser reduction the second year, (2%) and a more modest reduction the third year. (1%.) At year four, your mortgage interest, and monthly payments, would reset to the normal, locked-in rate that applies to your financing. 

There is also a 2-1 buydown. In this case, the interest rate is reduced for the first two years of the mortgage. For example, the rate would be 2% lower during the first year, then just 1% lower the second year. The rate would reset to the full, locked-in rate by year three. You might also find a 1-0 buydown, which means a discounted rate during the first year only. 

Mortgage buydowns are favored by sellers who want to sweeten the deal for buyers without lowering the home price. For buyers, a mortgage buydown provides an advantageous interest rate for a temporary period of time, enabling a lower mortgage payment for the first years of ownership. Depending on the size of the mortgage and the prevailing interest rates, a buydown can be a pretty good deal! But whether it’s better than a reduced home price, or other seller concession, is a case-by-case call. Do the math before you decide!

Not all mortgage lenders allow sellers to pay for a buydown. When buydowns are allowed, the buyer will need to qualify for the mortgage based on the full, locked-in rate, and not the reduced, temporary rate. If you work with a builder that offers a buydown, you should compare their financing offer to a mortgage you can obtain on your own. The existence of a buydown doesn’t automatically mean it’s the best deal! Before you talk to a builder, contact StartingPoint Realty for home buying guidance and financing referrals! We can represent you in a new construction purchase, and help you check the fine print! 

StartingPoint Realty – helping home buyers since 2004!

StartingPoint Realty proudly serves home buyers throughout the entire Chicago area. Get an introduction to home buying by attending our free home buying seminar! There’s no sales pressure and no obligation. We can also refer you to top mortgage lenders in Chicagoland – just ask!

Always feel welcome to contact us with your Chicago real estate questions!

Ryan Gable Broker/CEO Starting Point Realty
Phone: 847.348.1154

Email: RyanGable@startingpointrealty.com
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