Two Different Types of Mortgage Buydowns

Published on December 13, 2022 under Loan Programs

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Mortgage buydowns are options for borrowers who want to temporarily reduce their monthly mortgage payments. They are typically offered to entice borrowers during higher interest rates times.

There are two primary types of mortgage buydowns that we offer at First Savings Mortgage: rate buydowns and payment buydowns. 

1. Rate Buydowns

A rate buydown reduces the interest rate of a mortgage loan, without extending the length of the loan. A rate reduction can be granted for any period of time generally between one month and 2 years. The reduction can be anywhere between one and three percentage points or even more in some cases. It's important to note that the borrower is responsible for paying all of their principal, interest, taxes and insurance payments. 

This buydown offers the following advantages:

Temporary Lower Payments: Since this option reduces the interest rate of the loan, it also reduces payments overall. A lower payment has potential to improve a borrower's cash flow and spending ability, thus saving them thousands for a period of time.

Great for Borrowers Who Have a High Debt-to-Income Ratio: For borrowers who have a high DTI ratio, a buydown can help them afford the monthly payments of their mortgage. If you have any questions about your DTI ratio, contact our loan officers or contact your mortgage servicer to find out what they can offer you in terms of options.

With any mortgage option, there are pros and cons to each. Here are some downsides to consider before getting a rate buydown:

The Borrower is Responsible for All Other Payments: Any homeowner knows that having a mortgage payment is not the only major expense they have to pay. A rate buydown means that rather than having one major expense, you have multiple expenses. The borrower is responsible for paying their principal, interest and insurance payments at the same time.

Rate Buydown Interest Rate: A rate buydown effectively means that you are paying interest on your higher interest rate loan even after getting the lower one. Doing so could mean that you are paying more than the amount you will actually save with the mortgage option.

2. Payment Buydowns

A payment buydown is an option for borrowers who want to temporarily reduce their monthly payment, but are willing to extend the length of time on a loan or have a higher interest rate. A payment buydown means that the borrower is given a lower payment, but they extend the term of their loan and/or pay a higher interest rate.

This option has the following advantages:

Lower Payments: This option reduces payments without extending the length of time on the loan.

More Flexible Payment: The lower monthly payment can be used to pay off debt, make a bigger down payment on another home or pay for other needs.

More Interest Paid: A borrower can put the money they would have paid in interest on their mortgage into an investment account or savings account. This helps them build wealth and provides them with a high return over time.

First Savings Mortgage is proud to offer a variety of payment buydown options to our borrowers. We understand that each person's financial situation is unique, so we offer a range of options to choose from. We will work with you to find the best option for your needs.

Contact an Expert Loan Officer