With mortgage rates up near 7%, homebuyers are increasingly turning to things like adjustable-rate mortgages, down payment assistance, and interest rate buydowns to cut costs.
Interest rate buydowns can temporarily or permanently lower your mortgage payment, giving you more room in your budget each month. But they aren't always worth what you pay for them.
Temporary buydowns like the 2-1 buydown are becoming more popular as mortgage rates rise
A recent survey of mortgage loan officers by the real estate company HomeLight found that mortgage borrowers are increasingly interested in buydowns — specifically, 2-1 buydowns.
What is a 2-1 buydown?
Of the loan officers surveyed, 54% said that 2-1 buydowns are the most popular type of buydown right now, though in the past they've flown under the radar.
With a 2-1 buydown, your interest rate will be reduced by two percentage points for the first year you have your mortgage. The next year, it's reduced by one percentage point. After that, it returns to your regular rate.
For example, if your mortgage lender gives you a 7% interest rate with a 2-1 buydown, your rate will be 5% for the first year, 6% for the second year, and then it will return to 7% for the remainder of the loan term.
"What that does is on a $500,000 loan, that's typically about 600 to 700 bucks a month that you're saving in that first year," says Nick Friedman, president of homes at HomeLight. "And it goes to half of that [the year after], and then it goes to the full price."
How to buy down the interest rate on your mortgage
Temporary buydowns like 2-1 buydowns can be paid for by other parties to attract homebuyers in slower markets.
Get the seller to pay for it
Michael Read, owner of Bridgeway Mortgage and Bridgeway Real Estate Services, says that temporary buydowns are often paid for by the home seller or the real estate agent.
You can try negotiating a seller-paid buydown, but whether you're likely to be successful depends on your market and the property, Read says.
"If there's something that's on the market one day and there's multiple offers, going to the seller and asking to negotiate a concession so we can get our rate down probably isn't going to be a ploy that'll work in your favor," he says.
Look at new builds
If high interest rates are a big concern for you, you might want to consider looking at newly built homes where the seller is the homebuilder. Builders often have fairly generous buydown offerings.
Friedman of HomeLight says that builders have more money to work with, so you could get a really low rate that you wouldn't be able to find elsewhere.
"What I encourage people today is if you're really rate sensitive, look into buying new builds because that's a really great tool that you can use to potentially get a much lower rate, just given the access to capital that they have," he says.
Pay for it yourself
You can also pay for your own temporary buydown, but your money may be better spent elsewhere, such as padding your down payment or paying for a permanent buydown through discount points. Talk with your mortgage loan officer about your options.
Other types of buydowns
Temporary buydowns like the 2-1 buydown are popular right now, but it may also be worth it to permanently buy down your mortgage rate.
To do this, you'll pay for mortgage points. One mortgage point costs 1% of the loan amount and typically lowers your rate by a quarter of a percentage point (so a 7% rate would turn into a 6.75% rate permanently). You'll pay for mortgage points as part of your closing costs.
You don't need to purchase a full point to lower your rate; you can buy fractions of a point to balance your out-of-pocket costs with your interest rate savings.
There are also other temporary buydown options, like 3-2-1 buydowns and 1-0 buydowns.
Is buying down your interest rate worth it?
If you can get another party to pay for your buydown, it's absolutely worth it to take advantage of that. But whether you'll have this option may depend on the market you're in.
"If you're in a market where you see prices coming down and maybe homes are sitting longer, then you can maybe get the sellers to work in concessions" to lower your rate, Read says.
But in hotter housing markets, it may be hard to convince a seller to pay to lower your rate.
If you're the one who would be paying for the buydown, you should work with your loan officer to see what makes sense. A temporary buydown might not be the best option, since you're essentially just paying your interest up front. But if you plan to stay in the home long enough to break even on a permanent buydown, it may be worth it.
You should also consider whether you think you'll be able to refinance soon.
"I do think that we are going to be in a lower-rate environment this time next year," Read says.
Analysts still generally believe that mortgage rates will go down over the next couple of years, though how much they see rates dropping varies. If rates drop enough to make refinancing worth it, a buydown becomes less valuable.
