Interest buy downs are a financing strategy used in real estate transactions to make mortgage payments more affordable in the early years of a loan. This type of financing is often used by home builders and sellers to incentivize buyers, as it can help them qualify for a larger loan or make the monthly payments more manageable.
In an interest buy down arrangement, the seller or builder agrees to pay a portion of the buyer’s interest rate for a set period of time, typically one to three years. This subsidy allows the buyer to pay a lower interest rate during the initial period of the loan, which can significantly reduce their monthly mortgage payments.
How it works
The most common type of interest buy down is a “2-1 buy down”, which works as follows:
Year 1: The seller or builder pays enough money upfront to reduce the buyer’s interest rate by 2
percentage points for the first year of the loan.
Year 2: The seller or builder pays enough money to reduce the buyer’s interest rate by 1 percentage point for the second year of the loan.
Year 3 and beyond: The buyer pays the full interest rate for the remainder of the loan term.
For example, if the buyer’s interest rate without the buy down would be 5%, the seller or builder might pay a lump sum upfront to reduce the rate to 3% for the first year, 4% for the second year, and then the buyer would pay the full 5% for the remaining years of the loan.
Interest buy-downs can be a win-win for both buyers and sellers. For buyers, they can make mortgage payments more manageable in the early years of homeownership when expenses are typically higher. For sellers, interest buy-downs can make their properties more attractive to buyers, helping them sell homes more quickly and potentially at a higher price.
It’s important to note that interest buy downs are not the same as “no-cost” loans, which may have higher interest rates and fees in exchange for a lender subsidy. Buyers should carefully consider the long-term costs and benefits of any financing arrangement before making a decision. It’s also important to work with a trusted real estate agent or financial advisor who can provide guidance and help navigate the complexities of the home-buying process.