Many homebuyers are turning to rate buydowns as a way to manage higher mortgage interest rates. Here’s what you should know before deciding whether buying down your mortgage interest rate is the right financial strategy for you.

What is a mortgage interest rate buydown and how does a buydown work?

Simply put, this is when the home buyer or seller pays a sum of money to reduce the interest rate on a home loan — either temporarily or for the life of the loan.

“It’s a short-term strategy based on the assumption that interest rates will decrease in the near future and the borrower will refinance the loan,” says Zions Bank Regional Retail Mortgage Manager Jeremy Holmgren.

What are the benefits of a mortgage interest rate buydown?

For home buyers with a limited budget, buying down the interest rate can make the monthly mortgage payment  more affordable during the buydown period. The savings generated by the lower interest rate — even temporarily — can outweigh the cost of buying down the rate.

“Most people want as low of a payment as they can get right now,” Holmgren says. “Most are first-time or second-time homebuyers that don’t have as much income or assets and are just trying to get into a home and start establishing themselves.”

Considerations when choosing a mortgage interest rate buydown

It’s important to remember that this financial strategy only makes sense in a higher interest rate environment.

Do the math to be sure that the savings generated by the lower interest rate exceeds the amount you’ll pay to buy down the rate.

There’s some risk involved if your decision is based on rates decreasing in the near future. If you’re buying down the rate temporarily, make sure you’re willing to live with the higher rate once the buy down expires.

“There’s interest rate risk,” Holmgren explains. “But a lot of people are hedging their bets that rates will come down.”

Choose temporary or permanent rate buydown

With a permanent rate buy down from Zions Bank, borrowers can pay to lower their interest rate by a set percentage for the life of the loan. The cost for a permanent mortgage interest rate buydown is typically a percentage of the total loan amount.

Zions Bank’s temporary rate buydown — also known as a 2-1 rate buydown — is paid for by the seller. It lowers the interest rate in the first two years of the mortgage — by 2% in year one and 1% in year two.

In year three, the rate returns to the level that was agreed upon when the mortgage was approved. The cost for a temporary mortgage interest rate buydown is typically a percentage of the total loan amount.

“It’s a pretty good option to have,” Holmgren says. “When you’re buying a new home and trying to deal with higher rates, it’s a solution to help weather the higher rate storm.”

Zions Bank’s knowledgeable mortgage officers are available to help you through every step of the application process and can answer questions about mortgage interest rates and buy down options. Reach out today for more information or to schedule an appointment.

1. Loans subject to credit approval. Terms and conditions apply. See banker for details.
2. Buydown feature and cost subject to change at any time.