When individuals who are looking to buy a new home hear about increasing interest rates, their minds seem to inevitably shift toward waiting it out until interest rates start to decrease, but in some situations, they could end up losing you even more money in the long run. At Trophy Signature Homes, we are always keeping our potential homeowners up-to-date on the most relevant news traveling throughout the industry, and with buydowns offering a financial reprieve for many potential homeowners, we wanted to walk you through exactly how a buydown could get you into your new home as soon as possible.
What is a Buydown?
A buydown is a financing option that can be used when purchasing a new home, and it involves paying an upfront fee in order to lower the borrower’s interest rate for a certain period of time. This can result in a lower monthly mortgage payment for the borrower, making the home much more affordable right away.
When you look into it, there are several types of buydowns that are available to potential homeowners. The most common is a temporary buydown, where the interest rate is lowered for a certain period of time before returning to the original rate. With this type, the buyer can choose the length of the temporary buydown period—typically anywhere between one and five years—which allows them to tailor the buydown to their specific financial needs and goals.
Another option is a permanent buydown, where the interest rate is permanently lowered for the life of the loan. This can be beneficial for buyers who plan to stay in the home for a long period of time and want to have a lower, consistent mortgage payment.
What are the benefits of a Buydown?
First and foremost, a lower interest rate can significantly reduce the amount you pay in your monthly mortgage payments, making it easier to afford your new home and potentially save you thousands of dollars over the life of your loan.
In addition, a buydown can also help you qualify for a larger loan. By paying points upfront, you can reduce the amount of money you need to borrow and potentially qualify for a higher loan amount—a fact that can be especially beneficial if you have a lower credit score or a smaller down payment available to use.
Finally, a buydown can also be a good way to lock in a low interest rate. If you are purchasing a new construction home that will not be completed for several months, a buydown can help protect you from potential increases in interest rates.
Should you buy down your interest rate?
On the surface, buying down your interest rate may seem like an easy decision. After all, who wouldn’t want a lower interest rate on their mortgage? However, there are a few things you should consider before making this decision.
First, you need to understand that buying down your interest rate will come with a cost. This cost is typically paid upfront in the form of points, which are a percentage of the loan amount. While buying down your interest rate can certainly save you money in the long run, it’s important to consider whether or not it makes financial sense for you at this point in time. For example, if you are planning on staying in your new construction home for a relatively short period of time, it may not make sense to pay a large upfront fee to buy down your interest rate. On the other hand, if you are planning on staying in your home for a long time, buying down your interest rate could save you thousands of dollars in the long run.
It’s always important to carefully consider the terms of a buydown and how it will impact your overall mortgage payments before you commit to this type of financing arrangement. Before you determine whether or not a buydown is the right option for you, speak with a financial advisor or mortgage lender to figure out all of the options that best meet your specific financial situation.
A team that works for you
At Trophy Signature Homes, our team is constantly working to ensure that all of our potential homeowners have the most information at their fingertips to make the right decision for them when it comes to purchasing their new construction home. Ultimately, the decision to buy down your interest rate on a new construction home is a personal one that should be based on your individual circumstances and financial goals—and we are always here to help answer any questions you may have.
If you’ve decided that 2023 is your year to find the home of your dreams, we can’t wait to help you throughout your journey. Take a look at our new home communities that are located throughout the Greater Dallas-Fort Worth area and the Greater Austin area and give us a call at (214) 550-5733 or fill out our online form for more information.
*Offer not valid on contract re-writes, transfers, or for buyers who have had a previously signed contract with Trophy Signature Homes. Not applicable with any other offers. Terms and programs subject to change without notice. Interest rate offered applies only to Trophy Signature Homes financed through a preferred lender for a borrower's principal residence. Rate buy down dependent on rates at time of interest rate lock. Loans subject to credit, underwriting, and property approval. Not all loans available in all areas and not all borrowers will qualify. This is not a commitment to lend. Home loan products may involve appraisal fees, title search fees, and other fees, but there is no cost to obtain details or apply. Other terms and conditions apply. Homebuyers are not required to finance through a preferred lender to purchase a home; however, buyer must use a preferred lender to receive the advertised rate. For a 30-year FHA loan on a $325,000 home with a 3.5% down payment, $330,687 loan amount, 680 FICO score, and $24,004.83 in fees, with a note rate of 6.99% | 8.048% APR (includes upfront MIP), the monthly buydown principal and interest payments are as follows: Year 1 - P&I payment of $1,773.18 calculated at 4.99%; Year 2 - P&I payment of $1,980.51calculated at 5.99%; and Year 3-30 - P&I payment of $2,197.85 calculated at the note rate of 6.99% for the life of the loan. For a 30-year VA loan on a $325,000 home with a 0.0% down payment, $335,725 loan amount, 680 FICO score, and $28,851.93in fees, with a note rate of 6.99% | 7.636%APR (includes upfront MIP), the monthly buydown principal and interest payments are as follows: Year 1 - P&I payment of $1,800.19 calculated at 4.99%; Year 2 - P&I payment of $2,010.68 calculated at 5.99%; and Year 3-30 - P&I payment of $2,231.33calculated at the note rate of 6.99% for the life of the loan. For a 30-year USDA/VA loan on a $325,000 home with a 0.0% down payment, $325,000 loan amount, 680 FICO score, and $20,334.82 in fees, with a note rate of 6.99% | 7.647% APR (includes upfront MIP), the monthly buydown principal and interest payments are as follows: Year 1 - P&I payment of $1,760.80 calculated at 4.99%; Year 2 - P&I payment of $1,966.11 calculated at 5.99%; and Year 3-30 - P&I payment of $2,181.86 calculated at the note rate of 6.99% for the life of the loan. Principal and interest only payments shown. Does not include mortgage insurance, property taxes, hazard insurance, and HOA dues. An escrow account is created that the builder deposited money in to "buydown" the difference in the subsidized monthly payment amount and the note rate. Available for Trophy Signature Homes home buyers that obtain financing with BHome Mortgage. For with purchase contracts signed on 8/4/2023 or later. Most close by 9/30/23. 30-day lock expiration. Rates change daily. The 2-1 buydown option is not available for all loan programs or all loan amounts. Available for qualified Trophy Signature Homes buyers.