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!
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Ryan Gable Broker/CEO Starting Point Realty
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