What is a temporary buydown and when does it make sense to get one?

Temporary buydowns are best for those who need to buy a new home now, but expect to have a higher monthly income later. Basically, a temporary buydown helps people qualify for mortgages due to a smaller initial monthly payment. The interest payments are reduced for the first few years in exchange for a cash deposit. Then, they gradually increase over the course of a few years. For example, Guild’s seller-paid or lender-paid temporary buydown program reduces the interest rate for the first year by 2%, and 1% the following year. By the third year, payments resume as normal.  Buydowns can be added to many regular loan programs such as Conventional, FHA and VA loans.

Cash deposit (buydown fee)

While lower payments are helpful, a cash deposit is required. Also called the buydown fee, it’s what offsets the discounted interest. This cash deposit can come from a number of sources. The buyer can supply it, a family member can provide it as a gift or a motivated seller may be willing to pay it. Sometimes home builders pay the fee for families moving into newly constructed homes.

Temporary buydown vs ARM

Buyers in a similar position may also consider adjustable rate mortgages. These carry more risk. With the buydown, you do have the ability to plan your budget for the next few years with the stability of a more predictable loan program.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.