FHA Interest Rate Buy Downs

Often times lenders will allow borrowers to temporarily "buy down" the interest rate on a mortgage. The FHA 2-1 buy down allows a purchaser to reduce the initial interest rate on their mortgage by 2% the first year, 1% the next year, and 0% every year thereafter. It is important to note that there is generally a fee in the form of discount points to buy down a mortgage.

This 2-1 buy down should not be confused with a permanent buy down. A permanent buy down is when the borrower pays points to lower the interest rate on the mortgage over the life of the loan. Therefore, if you permanently buy down the note rate from 7% to 6.5% on a 30 year mortgage, your note rate will always be 6.5% for the next 30 years.

With a 2-1 buy down, if you were to "temporarily" lower the rate on a 7% 30 year mortgage, the interest rate the first year would be 5%, the next year would be 6%, and it would return back to 7% the third year and every year thereafter.

Most mortgage professionals generally do not recommend a 2-1 buy down for a mortgage if the borrower is paying for the buy down. This is because the costs that are charged the borrower at closing generally equal the savings in the lower payment. Furthermore, if the seller is paying for the buy down and the buyer will occupy the property for more than 3 years, most mortgage professionals will recommend a permanent buy down so that the borrower can enjoy the savings over a longer period of time.