What Is a Mortgage Buydown?

August 15, 2023

Mortgage rates have crept up lately and homebuyers are wondering what can be done to help them afford a new home. Incentives and price improvements have helped to ease the affordability issue, but the Maryland real estate market still remains robust. When working with Ameri-Star Homes on a new construction home, you could take advantage of a mortgage buydown and reduce your mortgage payment by hundreds of dollars. What is a mortgage buydown, exactly? We’ll break it down in this post.

What Is a Mortgage Buydown?

A mortgage buydown, also known as an interest rate buydown, is a way to reduce your mortgage rate for at least the first few years of your loan term. 

In the case of a new construction home, the buyer or the builder will pay the lender discount points to reduce the fixed rate. Each point is equal to 1% of the loan amount. The purchaser will negotiate with the lender what percentage the lender will reduce the interest rate per point. 

Most of the time, the buyer will interact with the lender. If the builder negotiates with the lender, it could be a strategy to offer people a new home with a lower interest rate. The mortgage buydown is locked in at the time of rate lock prior to closing.

Mortgage Buydown Structures

Mortgage buydowns can form different structures based on the negotiation. It is a way of arranging the points within the first year or so of the loan term.

For the Loan Term

You can buy enough points to keep your interest rate from ever going up. You could buy them in a bundle; it will cost more than the other options, but you will also have large savings.

1-0

An alternate form of an interest rate buydown is for it to only last the beginning of your mortgage term. A 1-0 buydown arranges a 1% decreased interest rate for the first year. The monthly payment will increase after that first year.

2-1

In the 2-1 model, the discount will last for two years. In the first year, the interest rate is cut by 2%, and in the second year, it is cut by 1%. For the remainder, it will be higher.

3-2-1

The same principle applies for the 3-2-1 model: 3% off the first year, 2% the second year, and 1% the third year. 

Talk with Ameri-Star Homes to learn more details about how mortgage buydowns work and if one is worth it for your new construction home.

Let Ameri-Star Homes Build Your New Custom Home!

Ameri-Star Homes was built on the idea that a home is not complete until the homeowner is 100% satisfied. That’s right, completely satisfied homeowners. Whether you want a home built on one of our home sites or on your own land, count on the same high quality from Ameri-Star. We have set out to exceed all your expectations of integrity, affordability, and customer satisfaction. Build lasting memories for years to come with Ameri-Star Homes. 

For more information, contact us today at 410-590-1000 or through our contact page. For more helpful custom home tips, keep in touch with us through Facebook, Twitter, LinkedIn, and Pinterest!