With interest rates hovering around 6.5% and the median price of a home at about $359,000 in 2023, many would-be homebuyers are frustrated in finding a home they can afford to buy. However, there are several ways to boost affordability in this market. One way is to bring your interest rate down and, by doing so, you’ll lower the amount you’ll pay each month for your mortgage and over the life of the mortgage.
To secure a more favorable interest rate, make sure your credit score is as high as possible and there are no blemishes on your credit report. You can also pay points to get a lower permanent interest rate. “Or, if you’re buying a new, existing or newly constructed home, you may be able to negotiate a “buydown” with a builder or seller for a temporary reduction of the interest rate, says Rick Maines, Construction Loans & Sales Manager for AAFMAA Mortgage Services LLC (AMS).
While terms will vary among lenders and there are restrictions on buydowns in some states, most buydowns will be limited to loans for new and existing homes, and the loan and borrower must qualify at the higher (fixed) rate to be eligible for a buydown.
What Is a Buydown?
A temporary buydown involves having the seller/builder pay a fee upfront to reduce the interest rate on a mortgage for a certain period of time. Temporary buydowns like these can only be paid by a seller or builder, not by the lender or borrower (although paying points upfront for a permanent interest rate reduction would be another option you can explore).
With temporary buydowns, the money is placed in an escrow account to subsidize the payment. This may allow you to effectively pay less for the home than the listing price and lower the initial mortgage payments for a set time.
The borrower and seller or builder must execute the buydown agreement at closing prior to funding approval. The seller/builder pays a lump sum to the lender in the actual difference between the standard interest rate and the lowered rate.
Taxes, Insurance and applicable mortgage insurance are required to be paid by the borrower as part of the payment for the full 30-year loan term, including the buydown period.
AMS Has Three Buydown Options
AAFMAA Mortgage Services LLC (AMS) offers three options for buydowns: 1/0, 2/1, and 3/2/1.
The naming of these products indicate how long they stay in effect and the amount the interest rate is decreased. In a 1-0 buydown, the buyer’s interest rate is lowered by 1% for the first year of the loan and then resumes at the fixed note rate for the remainder of the loan term.
In a 2-1 buydown, the interest rate would be 2% lower the first year and 1% lower the second, and then go to the fixed note rate.
A 3-2-1 buydown lowers the interest rate for three years. Here’s how that works: On a $400,000 30-year fixed-rate loan at 5%, the buyer would pay 2% the first year, 3% the second year, and 4% the third year. Then, for years 4-30, they would pay the full 5% note rate.
How Buydowns Benefit Military Borrowers
There are many reasons a buydown could be advantageous for a military buyer in today’s market. First, interest rates are expected to hold steady or rise slightly so having a lower rate for the first few years of your loan will save you money. Also, you could be anticipating a Permanent Change of Station (PCS) move in the coming one to three years, in which case you may want to sell the home, or refinance the loan anyway. If you sell the home or refinance the loan and pay off the original mortgage, any unused buydown funds are credited against the loan payoff.
Second, because the payment will rise after the first few years, a temporary buydown can be a good option for military buyers who expect their income to increase in the future, or perhaps their spouse will enter the workforce.
If you’re working with a seller/builder interested in offering you a buydown, consult with an AMS Military Mortgage Advisor to see how the buydown will affect your rate, what your “breakeven” point is, and if the buydown is a good move for you.
You can also consider paying points upfront to lower your rate permanently from the start of your loan.
We’re Here to Help
Whether you’re thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs. Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!
Rick Maines is the Construction Loans and Training Manager for AMS. He is based in Fayetteville, North Carolina and can be reached at 804-620-7263.