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What is a temporary rate buy-down?

A temporary rate buy down is an agreement between the borrower and lender on an interest rate lower than the permanent, or final, rate. For example, if the final rate will be 6.5% when you close the loan, a temporary buydown could get you an initial rate of 5.5%.  

The primary reason for a temporary buy-down is to lower the monthly payment on a mortgage, making it more affordable for the borrower. They can be particularly useful for borrowers with a high debt-to-income ratio, or those struggling to qualify for a mortgage at the current interest rates.  

There are a few different types of mortgage rate buy-downs. Some of the most common include:

• A 1-0 buy down, which reduces the interest rate by 1 percent for the first year.
• A 2-1 buy down, which reduces the interest rate by 2 percent for the first year and 1 percent for the second year.
• A 3-2-1 buy down, which reduces the interest rate by 3 percent for the first year, 2 percent for the second year, and 1 percent for the third year.

How does a rate buy-down work?

Even though you are getting a lower interest rate, the mortgage investor still needs to know they’re getting the cost of that interest. So how does that work?

The lender calculates the difference between the interest you would have paid at the full rate and what you will pay at a lower rate. That amount is deposited as a lump sum into an escrow account. The escrow account can be funded by your lender, the seller or a real estate agent you are working with. Then, money from the escrow account discharges alongside your monthly payments for the duration of the temporary buydown, making up the difference.

What is the benefit?

A 1-0 rate buy-down refers to a type of mortgage financing in which we reduce the interest rate for the first year of the mortgage. This helps to make the loan more affordable at the beginning, which allows you to enter the market even at a time of high-interest rates.

CapCenter's 1-0 rate buy-down

For a limited time, CapCenter will cover the cost of a 1-0 buydown for all purchase clients!

Who can benefit from a 1-0 rate buy-down?

Overall, a 1-0 rate buydown can be a useful tool for anyone looking to make their mortgage more affordable in the short term. It helps you save money on your monthly mortgage payments, which helps to make homeownership more attainable. You may benefit from a 1-0 rate buy down if you are a:

• A borrower who expects your income to increase over time: A 1-0 rate buy down makes a mortgage more affordable in the short term, which can be especially useful if you expect your income to increase over the first year of the loan.  
• A borrower looking to save money on your monthly mortgage payments: By reducing the up-front interest rate on a loan, a 1-0 rate buy down helps you save money on your monthly mortgage payments. This can be especially helpful if you are on a tight budget or are trying to save money for other short-term financial goals.  
• A borrower who is buying a home in a market with high-interest rates: A 1-0 rate buy down secures a lower monthly payment. This is great if you are otherwise ready to buy and just waiting on rates to fall a little more.

The pros of a 1-0 rate buy-down

• Interest paid is money saved: For the time that you have a lower interest rate under the buy down, you’re not responsible for that extra interest. It’s being paid out of an escrow account funded by someone else. That’s money right back in your pocket.
• Lower monthly payment: Your monthly payment will be lower for the first part of the loan. This comes in handy if you have other investments in mind, or if you need to make some repairs to your new house after moving in.

The cons of a 1-0 rate buy-down

Assuming you’ve found a lender that offers temporary buy-downs, the only real downside is that you have to find someone to fund it. In a buyer’s market, there tends to be more opportunity. Agents may be pushing hard to get a home sold, giving you more leverage to negotiate a buydown. Of course, through February 28, you don’t have to worry about leverage. CapCenter will fund the account for you.  

What's the benefit of using CapCenter's buy-down program?

The difference is that CapCenter offers a buy-down on top of our standard Zero Closing Cost loan. This means that you won’t be paying for all the unnecessary processing fees associated with getting a mortgage (which equals thousands in savings anytime you get a mortgage with us). When you're working with CapCenter, you're talking thousands in up-front savings and 1% off the rate. If you’re ready to buy but worried about interest rates, don’t be. CapCenter has you covered with a lower rate and Zero Closing Costs. Then, when rates go down, we’ve still got you covered with a Zero Closing Cost refinance.

The bottom line

There are a handful of temporary buy-down options for borrowers to choose from, though not all lenders offer all options. Temporary rate buy-downs offer the greatest benefit to people getting loans in a high-rate environment. Depending on how long you plan to keep the mortgage, you may be interested in different buy-down options.  

In any case, you’ll likely be looking for a refinance as the buy-down rate payments end and final rate payments begin. With CapCenter, you can get a funded rate buy down with Zero Closing Costs. Then, when it comes time to refinance, you can come back for a Zero Closing Cost refinance.