Interest Rate Buydown FAQs
What is a “buydown” on a loan?
A buydown is a temporary adjustment that lowers the starting mortgage interest rate and monthly payment for a set period of time—often a period of 1, 2 or 3 years. Buydowns are typically structured as 2-1 or 3-2-1 buydowns.
In a 2-1 buydown structure, the rate for the first year is 2% lower than the note rate; and in the second year of the loan, the rate is 1% lower than the note rate. In the 3-2-1 structure, the rate is 3% lower for the first year, 2% lower for the second year, and 1% lower for the third year.
What is a “note rate”?
The note rate is the interest rate that would be used to calculate the monthly mortgage payments if no buydown were applied.
What are the advantages of an interest rate buydown?
The significant advantage is that a buyer gets a lower payment in the initial years of the loan, which helps with affordability.
What does it take to qualify for a buydown?
The buyer must qualify at the note rate. Not the buydown start rate.
How much does it cost to put a buydown option on my loan and who pays for it?
When Meritage Homes offers an interest rate buydown as part of a promotion or finance incentive, we pay for it. There is no cost to the buyer.
How is a buydown different than an adjustable-rate mortgage (ARM)?
A buydown does not change the permanent note rate of the fixed-rate mortgage. It simply buys down the rate for the first couple of years. An ARM will adjust periodically for the entire term of the loan based on the current financial index and the margin specified in the loan agreement. Learn more about ARMs.
Can I refinance my loan during the period where my loan rate has been bought down?
Yes, the buydown feature on a loan does not change the buyer’s option to pay off or refinance their loan.
Is there anything specific that I should look for in the details of an interest rate buydown?
The most important element of the buydown it what the rate reduction is, and for how many years. You’ll want to confirm whether it’s a 2-1 Buydown or 3-2-1 Buydown. In a 2-1 structure, the rate in the first year is 2% lower than the note rate; and in the second year of the loan, the rate is 1% lower than the note rate. In the 3-2-1 structure, the rate is 3% lower for the first year, 2% lower for the second year, and 1% lower for the third year.
Are buydowns popular in the market today?
Buydowns are popular in the current rising interest rate environment because this type of loan allows the buyer to start the loan repayment at a lower monthly payment.
If I have additional questions about buydowns, where should I go?
Reach out to a Meritage Homes Sales Counselor in the community you’re interested in or contact an MTH Mortgage* Loan Consultant by calling 877-388-5362.