If you get pre-approved for a home loan and maintain a good credit score after that, it’s easier to get a mortgage buydown. This buydown can be temporary or permanent. Let’s understand how they differ.
Permanent Buydown Mortgage
A permanent buydown lets you pay extra points to get a low-interest rate over the life of your loan.
Buyers who choose the permanent buydown pay additional mortgage points. They are fees paid at closing to the lender, to reduce the interest rate and the monthly payment for the life of the loan. You must have adequate cash to pay for the mortgage points, down payment, and closing costs.
Here, mortgage points (also known as discount points) are the fees a home buyer pays directly to the lender (usually a bank) in exchange for a reduced interest rate. One point is equal to 1 percent of your mortgage loan amount, or $1,000 for every $100,000.
A permanent buydown has a lower interest rate for the whole term of the loan. So, if a borrower obtains a 30-year fixed rate mortgage with a permanent redemption, the interest rate will be lower for all 30 years.
Temporary Buydown Mortgage
A temporary buydown lowers the interest rate and monthly payments on the loan for just the first few years.
A typical temporary buydown is a “3-2-1”. It means that you calculate mortgage payment in years one, two, and three at rates of 3 percent, 2 percent, and 1 percent, respectively, below the rate on loan.
Temporary buydown options can lower your payments over the first few years. They are neither a commitment to lend, nor to get pre-approved for a home loan. The 3-2-1 plan, for example, requires an upfront payment. This reduces the interest rate in the first, second and third years by 3 percent, 2 percent, and 1 percent, respectively.
When considering paying for points to buy down a mortgage, it’s essential to calculate the break-even point. This tells you how long to stay home until the savings equal the amount you paid in points. Usually, it takes 3 to 6 years to break the tie from buying a mortgage. So unless you’re going to stay home for at least five years, it’s probably not worth buying down the rate.
How to Differentiate Between the Two?
The lender offers a lower rate in the permanent buydown by charging discount points. Normally, the more discounts you pay, the more you can lower your mortgage rate. The rate never goes up as long as you keep the loan. Unless you take out an adjustable rate mortgage (ARM), the rate will not increase over the life of the loan.
While in the temporary buydown, the initial rate is lower for a set time. Borrowers can opt buydown plans with rates up to 3% less than current mortgage rates. If market rates are 5%, a 2-1 buydown would allow you to make payments on an initial rate of 3% for the initial year. The rate increases each year depending on the plan you choose. The rate in the next year will increase to 4%. Rates typically increase by 1% per year for the remainder of the buydown plan.
So, chances are higher than in the long run, you save a lot more when you get a permanent buydown as compared to a temporary buydown.