Rate buy downs are a way to reduce interest rates and lower monthly payments, by having discount points paid at closing. These can be over the life of the loan, or temporarily for a period of six months to three years.
With rates expected to go down in the future, it usually makes the most sense for borrowers to use a temporary rate buy down, paid for by the seller, unless they plan on living in the home for more than five years.
Temporary rate buy downs, like a 3-2-1 buy down for example, allow the buyer to pay less interest on their mortgage over three years. The cost of this buy down is the total of principal and interest not paid via the normal payments over the first three years of the loan.
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