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The most common buydown is the 2-1 buydown. In the past, for a
buyer to secure a 2-1 buydown they would pay 3 points above current market
points in order to pay a below market interest rate during the first two years
of the loan. At the end of the two years they would then pay the old market rate
for the remaining term.
As an example, if the current market rate for a conforming fixed
rate loan is 8.5% at a cost of 1.5 points, the buydown gives the borrower a
first year rate of 6.50%, a second year rate of 7.50% and a third through 30th
year rate of 8.50% and the cost would be 4.5 points. Buydown were usually paid
for by a transferring company because of the high points associated with them.
In today's market, mortgage companies have designed variations of
the old buydowns rather than charge higher points to the buyer in the beginning
they increase the note rate to cover their yields in the later years.
As an example, if the current rate for a conforming fixed rate loan
is 8.50% at a cost of 1.5 points, the buydown would give the buyer a first year
rate of 7.25%, a second year rate of 8.25% and a third through 30th year rate of
9.25% , or a three-quarter point higher note rate than the current market and
the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works much in the
same ways as the 2-1 buydown, with the exception of the starting interest rate
being 3% below the note rate. Another variation is the flex-fixed buydown
programs that increase at six month interval rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of 1.5
points, the first six months rate would be 7.50%, the second six months the rate
would be 8.00%, the next six months rate would be 8.50%, the next six months
rate would be 9.00%, the next six months the rate would be 9.50% and at the 37th
month the rate would reach the note rate of 9.875% and would remain there for
the remainder of the term. A comparable jumbo 30 year fixed at 1.5 points would
be 8.875%.
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