Permanent Vs. Temporary Buydowns.

We'll Cover Three Main Points:

• What’s the difference?
• How do they benefit you?
• Why should you care?

What's the Difference between a Permanent & Temporary Buydown:

A permanent buydown is for the entire life of the loan. On the other hand, temporary buydowns are short-term, typically covering only the first, second, or third year of your mortgage before reverting to the regular rate. So, why would you choose a temporary buydown? Let's break it down. (see #1) ➡️

How do You Benefit from a Buydown:

Imagine you’re looking at a $550,000 purchase with 20% down at a 7% interest rate. For modeling purposes, this would give you a fully escrowed payment of $3,362, including taxes and insurance, with $118,000 in cash to close.

Now, if you opt for a permanent buydown, let’s say a 1% buydown, it’ll cost you 1% of the loan amount. With a $440,000 loan, that’s $4,400. This reduces your rate from 7% to 6.375%, lowering your payment to $3,180 and saving you $182 per month. You break even in 24 months, so if you plan to stay in the house longer, this makes sense.

But let’s compare that to a 2/1 buydown. One important note here: the 1% buydown is modeled as if the buyer is paying it, whereas the 2/1 buydown in this scenario is seller-paid. This strategy has benefits for both the buyer and the seller. (see #3) ➡️

With a 2/1 buydown, your rate is 2% lower in the first year, so instead of 7%, you’re at 5%, dropping your payment to $2,797—a $565 monthly savings. In the second year, the rate is 1% lower, so it’s 6%, making your payment $3,073—a $289 savings, still better than the permanent buydown.

Please see the additional examples for 1/1 and 3/2/1 buydowns. (see #2 & 4) ➡️

Why Should You Care:

The idea here is to create affordability now, knowing that rates will likely drop in the future. When that happens, you can refinance and potentially secure an even lower rate without paying points. For now, the 2/1 buydown saves you significant money upfront, and later, you can look into a permanent buydown when rates are more favorable.

In summary, the 2/1 buydown is a smart strategy if you expect rates to drop. It creates immediate affordability, and when you refinance, you could skip two months of payments, covering your refinance costs—making it essentially zero-cost in most cases. This strategy is powerful for both buyers and sellers.

If you have any questions or need more information, please don't hesitate to contact us. We're here to help you every step of the way!

Ready to start your home journey? Click here to submit your loan application today!

Michael Thayer

** Disclaimer **

The numbers and data presented here are subject to change daily or monthly. This information is provided for general discussion purposes only and does not constitute a formal quote or offer to extend credit. Don't hesitate to contact us directly for a personalized quote based on your financial situation.