Buying down an interest rate is a way for a seller to offer a financial incentive to a buyer. It results in a temporary reduction, which means lower payments under the buyer’s loan. Because of the dramatic increase in rates and the negative result on home sales, in early December 87% of home builders surveyed in the Southwest were buying down buyers’ mortgage rates to make payments more affordable. Not only builders, but some home sellers are also offering this incentive. Typically an interest rate buy down reduces the interest rate on the buyer’s loan for 2 or 3 years. The maximum allowed is 3% the first year, 2% the second and 1% the third. Then the interest rate reverts to the initial rate obtained by the borrower. This makes the loan and property more affordable, but the buyer must qualify at the initial loan rate – so a buy down might not help some purchasers. To buy down an interest rate, the seller pays “points”. Each 0.25% reduction in the rate typically costs around 1% of the loan amount, so buying points can be expensive for the seller.
