A temporary buydown is just that. Say the interest rate is 6.5%. A “1” buydown would start with year one at 5.5% and then the next year and all future years would be at 6.5%. A “2-1” buydown would start at 4.5% for the first year, 5.5% for the second year and the 3rd year, and the remaining years would be at 6.5%. The other temporary buydown option is called a “3-2-1” where the start rate would be 3.5%, then 4.5%, 5.5% for the 3rd year, and then in the 4th year and beyond would go to 6.5%. Of course, the rate being used here is only an example. Rates change daily and depend on a variety of factors like; Loan to Value, the credit score of the borrower, type of property, the list goes on and on.
To buy down the rate for the first year the cost was $2,776, to buy down the cost for the 2-1 buydown that cost is $8,183 and for the 3-2-1 the cost was $16,099. The buydown fee is paid upfront. If negotiated can often be paid by the seller. (see my article Strategies for Today’s Home Buyer). If you look at the total monthly payment you can see the impact on the first year of payment. There are other options as well. Like a” .5” and “1.5-.5” buydown.