buydown

Sellers are looking at all sorts of incentives to make their properties stand out from the competition. In this buyers’ market sellers are desperate to sell and will try a lot of incentives – many of which may make getting financing for buyers more difficult (e.g. decorating allowances, cash-back offers, etc.)

Buydowns, sometimes known as temporary buydowns, offer a great incentive to the buyers and can make their purchase of your home more affordable than other homes. A buydown offers the home buyer a lower interest rate and mortgage payment at the beginning of their mortgage – this can help buyers who are moving from an apartment to their first home or even move up buyers.

There are several types of buydowns but the most common is the 2-1-0 Buydown. For the first year of the mortgage the interest rate is “bought down” by 2% and in the second year the interest rate is “bought down” 1%. For the remainder of the mortgage the buyers will be paying the regular interest rate, or note rate.

For example, if the interest rate for a 30 year fixed mortgage is 5.0%, the buyers will pay 3.0% interest for the first year, 4.0% interest for the second year, and 5.0% for the remainder of the mortgage. The cost for a 2-1-0 buydown is typically about 2.5% - 2.75% of the mortgage amount (2.5 – 2.75 points) which the seller would pay as an incentive to the buyers to purchase their home.

If you are selling your home, speak with your lender and Realtor about offering this as an incentive to prospective buyers. If you are buying a home, keep this in mind as you make an offer and negotiate your purchase. A buydown can be a win-win situation for the buyers and sellers.