Pros and cons of mortgage buydowns

With today’s rising interest rates, those who want to build a home may be concerned about affordability.

One loan option to consider is a buydown, which we’ll explain here today. Please keep in mind that choosing a mortgage isn’t a one-size-fits-all endeavor. That’s why our experienced mortgage loan officers are here to provide individualized guidance for your unique needs. 

How a buydown works

A buydown temporarily reduces the interest rate for your mortgage in exchange for an upfront payment that offsets the interest that would be paid during that time. The cost is based on the interest rate and loan amount.

Benefits of a buydown

Buydowns are typically only available for single-family homes and may have other requirements depending on the type of mortgage you qualify for. The pros of this approach can include:

• Smaller payments in the early years of your home loan.
• Paying less interest over the life of your loan due to the initial savings.
• You may be able to qualify for a higher mortgage, allowing you to buy a more expensive home.
• If you’re paying for the buydown (as opposed to the seller covering it), you may be able to write off this expense on your income taxes.

Although the initial benefits of a lower interest rate are attractive, it’s important to think about the “big picture” of your finances, income, and objectives. Here are a few instances when a buydown can be a smart move:

• You anticipate moving in a few years. If you’re building the home to resell it soon, a buydown could be helpful.
• You’ve spent a significant amount of money preparing to build your home (such as buying the land).
• You expect to have large, one-time costs (like landscaping) in the early days of living in your new home.
• You’re in a career with a predictable and steady income growth.
• You or your partner will be entering (or re-entering the workforce) in a few years, increasing your income.

The other side of the coin

A buydown isn’t for every home — or every buyer. Some types of loans don’t offer this feature, so you may not qualify for this option. With most things in life, there are potential cons that may outweigh the pros. Here are a few to consider:

• If you’re building a home to live in it long-term, it’s important to understand what the regular payments will be after the buydown expires.
• You may dig deeper into your savings to cover the upfront buydown costs.
• Your closing costs will be higher in order to offset the lower interest rate.
• If an anticipated move or job transfer doesn’t occur, you’ll be responsible for the higher payments you were planning to avoid.
• When the buydown term ends, the full payment amount may be more than you can afford, putting your home at risk of default.
• If your income doesn’t increase (or your partner doesn’t enter/re-enter the workforce), your ability to make the higher payments could be in jeopardy.

Making the right choice

So, is a buydown right for you? Our experts can help you decide. Reach out today to learn what mortgage makes the most sense for your current situation and long-term goals.

*This article is designed to provide general mortgage education. It is not designed to provide legal, financial, or tax advice.