Interest Rate Buy-down Plans
Definition and meaning of Interest Rate Buy-down Plans in real estate.
Interest rate buy-down plans are financing arrangements where a builder, seller, or buyer pays an upfront fee to temporarily or permanently reduce the mortgage interest rate.
In more detail
These plans are popular in high-interest rate environments to make monthly payments more affordable for the buyer during the initial years of the loan. In a typical temporary buy-down, such as a 2-1 buy-down, the interest rate is reduced by two percent in the first year and one percent in the second year, before returning to the full rate in the third year.
The upfront cost, called a subsidy, is held in an escrow account and used to supplement the buyer's monthly payments. Builders frequently offer these plans as incentives to attract buyers to new developments.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Mortgage rate buy-downs |
| Common structures | 3-2-1 buy-down, 2-1 buy-down |
| Paid by | Typically the builder or seller as a buyer incentive |
A home builder offers a 2-1 buy-down plan on a new home, lowering the buyer's mortgage rate from a typical market rate to two percent lower in the first year, which reduces their monthly payment until the rate steps up.
Frequently asked questions
Who benefits most from a mortgage buy-down plan?
The buyer benefits from lower initial payments, while the seller benefits by making their property more attractive without having to lower the listing price.
What is the difference between a temporary buy-down and buying discount points?
A temporary buy-down reduces the interest rate for the first few years of the loan, whereas discount points require an upfront fee to permanently lower the interest rate for the entire life of the mortgage.