A mortgage buydown is an option to pay an extra upfront fee to reduce your mortgage interest rate. They come in two types: permanent or temporary. Permanent mortgage buydowns last for the entire length of the loan, resulting in decreased interest expenses at the cost of an upfront fee. Temporary buydowns last for a specified length of time, and typically are gradually phased out over the course of the buydown period. However, it’s possible for the upfront fee of a temporary buydown to exceed the interest reduction.
The decision of whether to take a permanent buydown or no buydown is relatively simple and only depends on whether you think you can afford the upfront payment. The decision of whether to take a temporary buydown or not is more complex. At first glance, those with a higher upfront fee than interest reduction can seem like a scam — paying more now in order to pay more over the course of the loan? Seems like a terrible idea. And it would be, if it were you as the buyer paying the upfront payment. However, with temporary buydowns, unlike with permanent buydowns, it’s most often something that the buyer requests that the seller pay for as part of the negotiation process. This way, the buyer gets to pay less in mortgage interest for a short time, and the seller pays extra to guarantee that the sale goes through. And if the upfront fee is less than the interest reduction, the buyer also has the option to pay for a temporary buydown themselves if the seller doesn’t want to.