What is a Buydown Refinance?

A buydown refinance has numerous benefits for homeowners looking to save money on monthly mortgage payments and long-term interest. It leverages the borrower’s home equity to reduce interest rates temporarily, creating substantial savings similar to those seen in a traditional buydown when purchasing a home.

Importantly, a buydown refinance is not an adjustable-rate loan. It is a fixed-rate loan that utilizes a buydown feature, which temporarily lowers the interest rate for the first two years of the loan. After this initial period, the loan transitions to the full fixed interest rate, offering stability and predictability for the remainder of the loan term.

For example, let’s consider a scenario where the borrower utilizes a 2-1 buydown refinance. In the first year, 2% of the interest rate is offset by the borrower’s equity, resulting in a lower monthly payment. In the second year, 1% of the interest is offset, and from the third year onwards, the borrower resumes paying the full fixed interest rate. This arrangement can lead to substantial savings during the initial period of the refinance while maintaining the security of a fixed-rate loan.

Not only does a buydown refinance save money, but it can also offer long-term benefits. By using equity to reduce the interest rate for a set period, homeowners can lower their monthly payments, freeing up funds for other financial goals or investments. In a high-rate environment, this strategy can offer a significant financial advantage.

Furthermore, a buydown refinance can lead to substantial savings in interest paid over the life of the loan. By lowering the interest rate for a period, the borrower can save thousands of dollars, even if rates are higher at the time of refinancing. This can be particularly beneficial for homeowners with significant equity built up.

A buydown refinance can provide significant benefits, particularly for homeowners seeking to reduce their monthly financial obligations or create more flexibility in their budget. By reducing the interest rate for a specified period, homeowners can allocate those savings toward other expenses or investments.

Advantages for Homeowners

In a 2-1 buydown, equity covers 2% of the interest in the first year and 1% in the second year, with the homeowner assuming the full fixed interest rate from the third year onward. This temporary buydown allows homeowners to enjoy lower monthly payments during the initial years of their refinance without worrying about future rate adjustments.

In today’s environment, there are opportunities for new fixed rates to continue the saving beyond year 2 with a fixed rate lower than many current loans of many homeowners.  Regardless of the rate environment, the 2-1 buydown feature offers cash flow to homeowners that would not otherwise be available.