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Buy Down Interest Rates:

What is an Interest Rate Buy Down?

While searching for a new construction home, you may have noticed that LGI Homes and other new home builders offer mortgages with interest rate buydown assistance or lower interest rates for a certain number of years. These programs are promotions and can cost the homebuilder thousands of dollars.

An interest rate buydown is when the home seller, in this case, the home builder, pays the lender to decrease your mortgage rate for a certain period.

This offer could shave hundreds off your monthly payments during the first few years of your home's mortgage. You should learn how the program works and determine if you can comfortably afford your mortgage when the buydown ends. Plus, you want to understand how buying down your interest rate works and how much it could save you.

So, let's learn more about this incredible offer and how it will help you secure the home of your dreams.

What is Interest Rate Buydown Assistance?

In short, interest buydowns allow you, the buyer, to benefit from lower interest rates on your mortgage during a set period, shaving money off your monthly payments. These buydowns expire after a set period, after which the mortgage loan returns to its agreed-upon interest rate. Your interest rate may increase in a tiered fashion; for example, it could increase after two years and then, a year later, rise again to your final fixed rate - or the reduced rate may last for a set period of years and then increase to your original fixed rate.

It's important to know that you purchased your home at a fixed interest rate and that the builder paid your lender for a temporarily lower interest rate rather than thinking your rate will rise when the program ends.

Interest rate buydown assistance involves new home builders like LGI Homes offering to "buy" a percentage of the interest rate down for the first couple of years – helping new homeowners ease their way into a new mortgage and saving them a significant chunk of money.

We'll investigate the details of buydown assistance programs, but first, let's review the benefits of interest rate buydowns.

Why Are Interest Rate Buydowns So Beneficial for Buyers?

The most obvious benefit of a buydown offer is that it saves money. By paying less interest over the initial term of the loan, you get to benefit from lower monthly payments immediately and pay less interest over the lifetime of your home loan.

Depending on the length of the buydown period and the value of the loans, this amounts to thousands of dollars in savings. That's why these offers are promotional or available for specific homes. They cost the builder money and are an excellent deal for the buyer!

There are plenty of other advantages, too. For instance, interest buydowns are fantastic for first-time buyers transitioning from renting to owning a home. They give you time to adjust to get used to mortgage payments and homeownership costs.

Alternatively, you can use the cost reductions secured via a buydown to boost your savings, put money towards furnishing your new home, or pay more towards the home loan's principal.

Review some examples below to visualize how buying down your interest rate works.

Examples of How Much You Can Save from an Interest Rate Buy Down Program

In general, lenders offer three different interest rate buydown programs. 1-0, 2-1 and 3-2-1; the 3-2-1 interest rate buydown is rarely used.

The 1-0 interest rate buydown offers the buyer a 1% discount on their mortgage payment for one year. After the first year, their monthly mortgage payment increases to reflect the agreed-upon interest rate.

The 2-1 interest rate buydown gives the buyer two years of lower mortgage payments; the first year's interest rate is 2% less, the second year is 1% less and in the third year, the buyer starts paying their mortgage at the rate they agreed to when buying the home.

The 3-2-1 interest rate buydown gives the buyer three years of lower mortgage payments; the first year's interest rate is 3% less, the second year is 2% less, the third year is 1% less and in the fourth year, the buyer pays their mortgage with the regular interest rate.

LGI Homes has offered buyers of select homes a 2-1 interest rate buydown, meaning two years of reduced interest rates on your mortgage loan. When this promotion is available, we place the money into an escrow account, and you benefit from two years of reduced mortgage payments. Contact the location of your interest to find out if any rate incentives are currently available.

How much can I save from a 2-1 Interest Rate Buydown?

The amount you can save each month, or overall, depends on the loan amount. Let's take a look at an example.

Based on a sales price of $400,000, with a 10% down payment, and a 30-year loan at an interest rate of 7.125%, you can expect the following savings:

Loan Amount: $360,000

Year 1
Rate: 5.125%
Payment: $1,958.35
Monthly Savings: $465.33
Annual Savings: $5,583.95

Year 2
Rate: 6.125%
Payment: $2,185.61
Monthly Savings: $238.07
Annual Savings: $2,856.78

Year 3
Rate: 7.125%
Payment: $2,423.68
Monthly Savings: $0.00
Annual Savings: $0.00

TOTAL SAVINGS: $8,440.74

Remember, these figures are used for example purposes only and do not include taxes and other fees that may apply. Please check with your lending professional for estimates regarding your loan.

As you can see, that's a hefty savings and will leave you with an opportunity to save, invest or spend the money you save monthly on your mortgage payment however you please.

Who can Buy Down the Interest Rate on a Mortgage?

Homebuyers and home sellers/home builders can buy down the interest rate on the homebuyer's mortgage.

Homebuyers usually negotiate an interest rate buydown with the lender and pay a specific amount at closing; this can make their mortgage payment lower throughout the life of the loan.

When a seller or homebuilder buys down the interest rate, they negotiate with the lender. The money they pay the lender is put into an escrow account to pay for the discounted points. The escrow money may discount the mortgage for the life of the loan, or it will be for a specific period/

Key Takeaway: Some buydowns last for the life of the home loan, while others last for a certain period. Either way, buyers can save thousands when the home seller buys down the interest rate. 

How Much Does It Cost to Buy Down My Interest Rate for the Life of My Mortgage?

When it comes to the life of a mortgage, the cost of a discount point depends on the amount of the home's purchase price. A lender charges the borrower 1% for each point; an interest rate point equals 0.25%.

If you obtained a mortgage for $300,000 with an interest rate of 8%, you could pay $3,000 upfront to lower the interest rate to 7.75% for the life of the loan. Notice that in this example, the savings last for the life of the loan. 

This example highlights why lenders created different interest-rate buydown programs. Interest buydown programs like the 1-0, 2-1, and 3-2-1 allow builders to offer attractive promotions and incentives and help homebuyers realize significant monthly savings for shorter periods.

At times, LGI Homes has offered a 2-1 buydown benefit on select homes. Contact an LGI Homes New Home Consultant at the community you want to live in today to schedule a tour and ask if any interest rate promotions are currently available.

You may also be interested in learning about loans for first-time homebuyers, USDA home loans, or the requirements for an FHA loan.

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