Understanding Temporary Buydowns – A Smart Way to Lower Initial Mortgage Payments

I want to give you a little more information on Temporary Buydowns to help homebuyers ease into their mortgage payments. Understanding how this works can make a big difference in today’s higher-rate market, whether you’re a buyer, Seller, or agent.

What Is a Temporary Buydown?

A temporary buydown lowers your interest rate and monthly payment for the first few years of a home loan. The Buydown gives a buyer financial breathing room for the first year, two or three while waiting for rates to fall.

Types of Temporary Buydowns

1/0 Buydown – Year 1 = 1% below note rate – year 2-30 at note rate – Seller or Lender paid

2/1 Buydown- Year 1 = 2% below note rate – year 2= 1% below note rate – year 3-30 = note rate – Seller or Lender paid

3/2/1 Buydown – Year 1 – 3% below note rate – year 2 = 2% below note rate – year 3 = 1% below note rate – year 4-30 = note rate – Seller paid only

Who Pays for the Buydown? Seller or lender (buyer can, but it makes no sense)

Seller-Paid Buydown

• Cost is covered by the Seller as part of the deal.
• Typically .875 for a 1 year, 2.75% for a 2 year and 5.5% for a 3 year buydown.
• Buyer qualifies at the note rate

Lender-Paid Buydown

• There is no upfront cost to the Seller or buyer.
• The lender raises the note rate to cover the discount.
• Results in a higher payment after the buydown period ends but lowers the purchase price now vs. having a seller pay the fee.

Real-World Scenario: $1 Million Purchase | 25% Down

• Purchase Price: $1,000,000
• Down Payment: $250,000
• Loan Amount: $750,000
• Market Interest Rate: 6.750% (30-year fixed)

Seller-Paid 2-1 Buydown

• Cost to Seller: $17,250 (2.3%)
• Year 1 @ 4.750%: $3,912/month
• Year 2 @ 5.750%: $4,377/month
• Years 3 - 30 @ 6.750%: $4,864/month

Seller-Paid 1-0 Buydown

• Cost to Seller: $5,850 (0.78%)
• Year 1 @ 5.750%: $4,377/month
• Years 2 - 30 @ 6.750%: $4,864/month

Lender-Paid 2-1 Buydown – Since we are not asking the seller to pay $17,250, we can reduce the price and loan amount by $17,250

• Home Price Reduced to: $982,250
• Loan Amount: $732,250 (still 25% down)
• Base Rate Increased to: 7.375%
• Year 1 @ 5.375%: $4,100/month
• Year 2 @ 6.375%: $4,568/month
• Years 3 - 30 @ 7.375%: $5,057/month

Lender-Paid 1-0 Buydown -Since we are not asking the seller to pay $5850, we can reduce the price and loan amount by $5850

• Home Price Reduced to: $994,150
• Loan Amount: $744,150
• Base Rate Increased to: 7.000%
• Year 1 @ 6.000%: $4,462/month
• Years 2 - 30 @ 7.000%: $4,951/month

What If You Refinance After 12 Months?

Let’s say rates drop and you refinance to 6.000% fixed after 1 year.

Seller-Paid 2-1 Buydown $742,006 $4,448/month (you will get a refund for year 2 of the Buydown $5850)

Lender-Paid 2-1 Buydown $725,333 $4,348/ month (you will get a refund for year 2 of the Buydown $5850)

Seller-Paid 1-0 Buydown $742,006 $4,448/month

Lender-Paid 1-0 Buydown $736,590 $4,416/month

Result: The lender-paid option results in a lower balance and smaller payment after refinance, thanks to the lower starting loan amount.

Final Thoughts

Temporary buydowns are a win-win:

• Buyers get lower payments upfront.
• Sellers can attract more buyers.
• Agents can help both sides find the right structure.
• Lender-Paid buydowns are a great option if you are going to refinance within the first 4 years.

If you have an analytical client who is on the fence or just someone trying to save a few bucks temporarily, we can help design a program that makes them comfortable.

I am happy to review these options and more with you or your clients and break down a strategy to make them feel comfortable.

Here is the crazy thing that nobody talks about… let’s say, worst case scenario, we get the client a 2/1 buydown, and we roll into 2027 with comparable rates, and they are freaking out that their rate, which is at 6.375% will go to 7.375%. HELLO! We can do a 2/1 buydown refinance again at 5.375 / 6.375 / 7.375 and get them another 2-year window! Again, I can’t control rates, but I can help people make better financial decisions. Not owning a home is not an option in my eyes! Allow me to help those fence-sitters get to the finish line!

Please let me know if you have any questions or if a client needs my guidance. I’m just a call, text, or email away.

📞 Cell: 661-714-6258

TEXT: 661-714-6258

📞 Office: 661-260-2970 ext. 2222

📞 Direct Line: 661-291-2222

📧 Email: Mike@AugustaFinancial.com

But wait, there’s more…

Interest Rates

Rates have been up slightly and down over the past week or so. The numbers seem to be there for lower rates, but nothing seems to help.

Loan Programs

• We do loans on Non-warrantable condos!
• We offer 12-day escrows for pre-approved buyers - Conventional/FHA/Jumbo/Bridge loans.
• We provide loans in all 50 states, so call me with anything you need.
• Government loans (FHA/VA/USDA) are in the high 5’s and low 6’s.
• Conventional loans up to $806,500 are in the mid 6s.
• High Balance Loans from $806,501 to $1,209,750 are also in the 6’s.
• Jumbo loans above $1,209,750 are in the 6’s and 7’s.
• Bank statement loans are available with 10% down again, with larger down payments in the 6’s ++.
• Profit and Loss Statement loans require 20% down - no bank statements needed, only a profit and loss statement!
• 0 down loans are available in the high 6s, with a minimum credit score of 620, up to $1,300,000.
• Private Money lenders offer Hard Money Loans with 35% down.
• No Ratio Loans require 30% down.
• DSCR (Debt Service Coverage Ratio) loans are available with as little as 15% down.
• Bridge Loans typically have an interest rate of 7.99% with limited fees, helping you get where you need to go!
• 3/2/1 Buydowns, 2/1 Buydowns, and 1/0 Buydowns are available at great starting rates!

Please note that interest rates are subject to change without notice, and the information above reflects LA County Loan Limits.

**Good News for Condos:**   

Friendly Village: All condos are good to go except #5! So 12 out of 13 is not a bad number! Repairs have been made, and I assume #5 is not far behind!

**Bad News for Condos***

Parklane Condos – Simi Valley CA  – Insurance is adequate!

The full state of California naughty list has been added to MikeMeena.com! See the link below:

https://mikemeena.com/non-warrantable-condos/

Let me know if you hear anything new about condos or townhouses.

I am available every day if you need anything.

📞 Cell: 661-714-6258

TEXT: 661-714-6258

📞 Office: 661-260-2970 ext. 2222

📞 Direct Line: 661-291-2222

📧 Email: Mike@AugustaFinancial.com

Have a great day and an even better tomorrow! Please call me when you have a client who needs to borrow!