By Sal Moschitta
The average 30-year fixed rate mortgage today is 6.58%. This is a far cry from the days of sub 3% interest rates we saw most recently in December of 2021. The payment on a $500,000 loan at today’s rate would cost you roughly $1,000 per month more in payment than it would have less than two years ago. The rising interest rates have caused many homebuyers to put their purchases on hold until homeownership becomes more affordable. However, there is a way in today’s market you can bridge that gap to make your payment more affordable.
With the help of a buydown, you can lower your interest rate for the first 3 years and slowly work up to that higher payment.
| YEAR | EFFECTIVE RATE** | MONTHLY PAYMENT*** | BUYDOWN SAVINGS P/MONTH | PAYMENTS | YEARLY BUYDOWN SAVINGS |
|---|---|---|---|---|---|
| 1 | 3.50% | $2,245 | $915 | 12 | $10,980 |
| 2 | 4.50% | $2,533 | $627 | 12 | $7,524 |
| 3 | 5.50% | $2,839 | $321 | 12 | $3,852 |
| 4-30 | 6.50% | $3,160 | – | – | – |
The 3-2-1 Buydown would decrease your interest rate by 3% for the first year, 2% for the second year, and 1% for the third year. Years 4-30 are no longer discounted and would go back to the note rate of 6.500%. There is also an option for a 2-1 buydown, and a 1-0 buydown that works the same way simply shortening the timeframe before you jump to that higher payment.
This program has been around for 20 years, however, it has only been used in times of high inflation-rising rate environment like today. The purpose is to soften the payment shock (lower payments) during a rising rate cycle and help bridge the gap to a decreasing rate environment. Historically, rates increase during times of high inflation, and conversely, decrease when we enter a recession. We are expected to enter a recession in 2023.
In times of recession inflation decreases, and in turn, interest rates decrease. Every recession in the history of this country has seen a decrease in interest rates to coincide with it. If this holds true the buydown offers you the opportunity to have an interest rate below market for the first 3 years. This does not prohibit you to refinance this loan to a new lower-interest-rate mortgage once rates come back down to earth sometime between 2023 and 2024.
