Temporary Mortgage Buydown

A temporary mortgage buydown provides a temporary reduction in the effective interest rate used to calculate your payment during the beginning of your mortgage. The result is a lower principal and interest payment during the buydown period.

Unlike a permanent rate reduction, the temporary reduction ends according to a predetermined schedule. Your mortgage itself is based on the full note rate, so you’ll know from the beginning what rate applies after the buydown period ends.

For eligible conventional loans, Fannie Mae requires borrowers to qualify based on the note rate—not the temporarily bought-down rate—and the temporary buydown does not change the terms of the mortgage note.

A temporary buydown may be worth exploring if you’re ready to purchase a home but would benefit from lower mortgage payments during your first year or two of homeownership.

It may be especially helpful for buyers who need to move now because of a job relocation, family change or other circumstances and don’t necessarily have the flexibility to wait for interest rates or market conditions to change.

The important thing to remember is that the savings are temporary. Your payments increase according to a predetermined schedule until they reach the payment based on your full note rate.

Depending on your loan amount and temporary buydown option, the reduced payments during the initial years can add up to thousands of dollars.

But a temporary buydown isn’t about qualifying for more home based on a temporarily lower payment. For applicable conventional mortgages, borrowers qualify based on the full note rate rather than the bought-down rate.

Instead, a temporary buydown can provide some additional room in your monthly budget during the early years of homeownership—when you may also be managing moving expenses, furnishings, repairs and other costs that come with settling into a new home.

Higher mortgage rates don’t affect only buyers. They can also make it more challenging for sellers when prospective buyers are concerned about monthly payments.

Rather than reducing the home’s purchase price, a seller may be able to contribute toward a temporary mortgage buydown as part of the purchase negotiation. The buyer gets the benefit of lower initial mortgage payments while the negotiated purchase price remains unchanged.

Whether a seller-paid temporary buydown makes sense—and how much a seller can contribute—depends on the individual transaction and applicable loan guidelines.

When higher interest rates are making monthly payments a concern for your buyers, a seller-paid temporary buydown gives you another financing option to discuss.

Instead of focusing exclusively on negotiating the purchase price, an eligible seller concession may be used to fund lower initial mortgage payments for your buyer. That can provide another way to approach conversations between buyers and sellers when financing costs are affecting the transaction.

First State Bank facilitates both 2/1 and 1/0 temporary buydowns. Our loan officers can help you understand how these options work and when they may be available for your clients.