The Benefits of a Temporary Mortgage Buydown

A temporary mortgage buydown allows you to pay off some of your home loan interest up front with a lump cash payment. As such, you can reduce your monthly payments for the first one to three years of your mortgage. In most cases temporary buydowns are paid by the seller as an incentive to get you to purchase the home. If your seller offers a buydown, consider these benefits:

Decreased Cost of Home

Essentially, when a seller offers a buydown, the seller is actually reducing the total cost you will have to pay for the home. The sticker price on the home remains the same, but your financing cost over time drops slightly. Depending on how the buydown is set up, including how long it is and how large it is, your savings could be sizable. The most common forms of temporary buydowns are 2-1 buydowns and 3-2-1 buydowns. In a 2-1 mortgage buydown, the seller pays up front to drop your interest rate by two percent in the first year and one percent in the second year; you will pay your standard interest rate upon the third year. A 3-2-1 buydown goes back one year further, dropping your interest rate three percent in the initial year.

Decreased Monthly Payments

A lot of buyers get caught up in the price of a home when they are looking to buy. As long as your mortgage is large enough to cover the price, though, the cost of the home does not affect you nearly as much as the monthly payments. Monthly payments are the measure of whether your home is within your affordable range or too expensive. If you get a great mortgage deal on an expensive home, then, you can afford more. Some people will pursue a subprime mortgage to allow them to do this. This keeps the loan cost low in the first few years; the borrowers hope their incomes will increase enough to afford higher payments in the future. This is highly risky. The same benefits can be had without the risk by pursuing a buydown instead. Your mortgage will cost the least when you have the lowest salary and the greatest need for flexibility with your money.

Mortgage Negotiation Power

When you are negotiating your mortgage, a potential buydown gives you another factor to bring into play. Instead of only attempting to give a low offer on the home's price, instead ask for a buydown. This will actually make your home more affordable where a decrease in price usually has only a small impact on your monthly payment. Sellers often prefer this option as well. While they would be wise to opt for the decrease instead, sellers also focus strongly on the price of their home and have a personal belief of what the home is worth. Even when a seller won't compromise on price, the same seller will often agree to pay closing costs or buydown the mortgage. Use this option to negotiate the right price for your mortgage and monthly payments.