Mortgage Buydown Loans
The most common buydown is the 2-1 buydown. In the past, for a buyer to
secure a 2-1 buydown they would pay 3 points above current market points in
order to pay a below market interest rate during the first two years of the
loan. At the end of the two years they would then pay the old market rate for
the remaining term.
As an example, if the current market rate for a conforming fixed rate loan is
8.5% at a cost of 1.5 points, the buydown gives the borrower a first year rate
of 6.50%, a second year rate of 7.50% and a third through 30th year rate of
8.50% and the cost would be 4.5 points. Buydown were usually paid for by a
transferring company because of the high points associated with them.
In today's market, mortgage companies have designed variations of the old
buydowns rather than charge higher points to the buyer in the beginning they
increase the note rate to cover their yields in the later years.
As an example, if the current rate for a conforming fixed rate loan is 8.50%
at a cost of 1.5 points, the buydown would give the buyer a first year rate of
7.25%, a second year rate of 8.25% and a third through 30th year rate of 9.25%
, or a three-quarter point higher note rate than the current market and the
cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works much in the same ways
as the 2-1 buydown, with the exception of the starting interest rate being 3%
below the note rate. Another variation is the flex-fixed buydown programs that
increase at six month interval rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of 1.5 points, the
first six months rate would be 7.50%, the second six months the rate would be
8.00%, the next six months rate would be 8.50%, the next six months rate would
be 9.00%, the next six months the rate would be 9.50% and at the 37th month
the rate would reach the note rate of 9.875% and would remain there for the
remainder of the term. A comparable jumbo 30 year fixed at 1.5 points would be
8.875%.
