Want a Lower Mortgage Rate? You Can Buy It Down!

Many homebuyers today are losing sleep over steeply rising interest rates, which have more or less doubled over the past year and reached their highest level in two decades. Now hovering in the mid-6 % range, these higher rates are adding hundreds, or even thousands, to the monthly housing costs of new buyers.

Yet buyers who feel trapped into paying high interest should know that there is a way to lower that rate with a mortgage rate buy-down.

True to its name, a mortgage rate buy-down is where money is paid upfront to “buy down” the interest rate on the loan for a certain period of time. This, in turn, can reduce the buyer’s monthly mortgage payments—at least temporarily—so the buyer can ease into the housing costs.

Best of all? Buyers don’t pay for buy-downs. Rather, home sellers, builders, and sometimes even lenders front the costs in order to entice cash-strapped buyers to the closing table.

How a mortgage rate buy-down works

In a nutshell, a buy-down offers a homebuyer lower monthly mortgage payments for a set period of time, typically one to three years. After that point, the interest rate returns to the original higher rate.

A buy-down comes in various forms in order to suit a borrower’s circumstances. Here are some of the most common ones out there today.

Types of buy-down loans

2-1 buy-down

A 2-1 buy-down means that during the first year of your mortgage, the interest rate you’ll pay will be 2% below market. In the second year, it will be 1% lower.

Here’s the gist of how that plays out with a 30-year fixed mortgage on a $300,000 house, with a 5% down payment and 7% interest rate.

In Year 1, the interest rate is 5% and the monthly mortgage payment is $1,529.94. The yearly savings is $4,394.05

In Year 2, the interest rate is 6% and the monthly mortgage payment is $1,708.72. The yearly savings is $2,248.72.

In Years 3–30, the interest rate is 7% and the monthly mortgage payment is $1,896.11.

The total savings over the entire loan term is $6,642.77.

3-2-1 buydown

This buy-down temporarily lowers the borrower’s interest rate for the first three years. As the name implies, the interest rate is reduced by 3% in the first year, 2% the second year, and 1% the third year. The payment reverts to the original note for the remaining 27 years (or as seen below, Years 4–30).

Here’s how it unfolds when you buy a $300,000 house with a 5% down payment and an interest rate of 7% for a 30-year fixed mortgage.

In Year 1, the interest rate is 4% and the monthly mortgage payment is $1,360.63. The yearly savings is $6,425.74.

In Year 2, the interest rate is 5% and the monthly mortgage payment is $1,529.94. The yearly savings is $4,394.05.

In Year 3, the interest rate is 6% and the monthly mortgage payment is $1,708.72. The yearly savings is $2,248.72.

In Years 4–30, the interest rate is 7% and the monthly mortgage payment is $1,896.11.

The total savings over the life of the loan is $13,068.51.