Did you know that mortgage rates in Minnesota are as high as almost 7% for the first time in a long time? A mortgage buydown can help to lower the bottom line of your mortgage.
What's in this article?
Mortgage rate buydowns allow the lender to be paid up front in exchange for a lower interest rate for the first few years of your mortgage.
There are two types of buydowns: permanent and temporary buydowns.
Understanding the difference between a permanent buydown and a temporary one can help determine whether the additional up-front cost is justified.
Read on to learn about mortgage buydowns.
Whats a buydown?
Buydowns are comparable to a mortgage subsidy the seller provides on the buyer’s behalf, but buyers can also pay for a buydown themselves to the lender.
A financial contribution is made to an escrow account that temporarily lowers the loan’s initial interest rate and monthly mortgage payment. The contribution for a temporary buydown must be made by the seller; but for a permanent buydown, that payment can be made by either the seller or the buyer.
Home sellers can benefit from providing a buydown in order to sell a home faster, and buyers benefit as the buydown ensures a lower monthly payment for a specified amount of time.
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How are buydowns structured?
A buydown can be for the term of the loan or for a specific number of years. There are some temporary buydowns, such as a 2-1 buydown and 3-2-1 buydown.
A 2-1 buydown is a particular kind of mortgage buydown that allows homebuyers to save money on their interest rate for the first two years of the loan until the third year when the lower interest rates transition to the actual rate agreed upon in the loan contract.
The 3-2-1 buydown is for the first three years of the loan with the buyer making reduced payments during that time. The interest rate for the buyer would rise gradually by 1% a year for the first three years of the mortgage until the fourth year when the full interest rate would take effect.
How much does it cost to “buy down” an interest rate in Minnesota?
In Minnesota, potential homebuyers can consider “buying down” their rate as a way to reduce their first few years’ monthly loan payments.
Buydowns are structured as a one-time payment to the lender at closing time. This payment is typically a lump sum that is applied to the loan balance and reduces the interest rate for a certain period.
The cost to buy down an interest rate in Minnesota can vary significantly depending on the loan amount and the buydown rate.
Generally, the cost to buy down an interest rate is a percentage of the loan amount and is based on the amount of buydown desired.
For example, if a homebuyer wanted to buy down their interest rate by 1%, the cost would be 1% of the loan amount. If the loan amount was $200,000, the cost to buy down the rate by 1% would be $2,000. This cost is typically paid upfront and is non-refundable.
It’s important to note that the amount of buydown and the cost associated with it can vary from lender to lender, so shop around and compare rates and costs before making a decision.
Are there limits on buydowns in Minnesota?
In Minnesota, there are limits on buydowns. Buydowns are structured in a way that allows the homebuyer to reduce the initial monthly payments on their mortgage.
Most buydowns are limited to a maximum of three points, which means that the homebuyer will pay three percent of the loan amount as a one-time fee.
Buydowns can also be used to reduce the monthly payments for the entire loan term, but the amount of the buydown is limited to the amount of the initial fee.
Who can buy down a mortgage?
Although a buydown is advantageous to the buyer, the buyer cannot fund a temporary buydown such as a 2-1 or 3-2-1 buydown.
However, either buyers or sellers can purchase discount points—often called simply “points”—to permanently lower the buyer’s interest rates.
As a buyer, purchasing discount points is the most straightforward approach to lowering your mortgage rate.
Each point, which equates to 1.0 percent of your loan balance, lowers your interest rate by 0.25 percent.
For instance, you can spend one point ($1,000) to receive a 5.75% interest rate instead of the 6% given on a loan for $100,000.
It’s important to compare your monthly savings with how long you want to own the home before deciding to perform a rate buydown. A rate buydown will benefit you more the longer you live there.
The cost of discount points can occasionally be rolled into your mortgage but doing so may defeat the purpose of the points by lowering your savings and altering your loan-to-value ratio, which could result in higher fees elsewhere.
Is a 2-1 buydown a good idea in Minnesota?
This depends on the specifics of the situation.
A 2-1 buydown can be a good idea in Minnesota if the buyer has the financial resources to make the additional payments and the market conditions are favorable.
Consider the current market conditions and your financial situation before deciding whether a 2-1 buydown is good.
Additionally, it’s important to conduct further research on living in Minnesota, the overall real estate market and the home-buying process in Minnesota.
Get Committed with Compass Mortgage
Buydown in Minnesota can be easy with Compass Mortgage. If you’re considering buying a new house or refinancing in Minnesota, buy down your mortgage with us today.
To show you our commitment, we offer Get Committed®, a program which locks in a favorable interest rate and helps you close faster. Get a fully underwritten mortgage commitment from us with this program.
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