Total Interest Paid (Full Term, No Buydown): $0.00
Total Interest Paid (Full Term, With Buydown): $0.00
Total Interest Saved: $0.00
Understanding Mortgage Buydowns
A mortgage buydown is a financing tool designed to temporarily lower your monthly mortgage payments. It's often used to make a home more affordable, especially during the initial years of homeownership when cash flow might be tighter or interest rates are high. Essentially, you or the seller prepays a portion of the interest to reduce the rate for a specified period.
How Mortgage Buydowns Work
The core concept of a buydown is to "buy down" the interest rate for the first few years of the loan. This is achieved by depositing funds, typically paid by the seller or builder (though a buyer can also pay for it), into an escrow account. These funds are then used to subsidize the interest payments, effectively lowering the borrower's monthly payment for a set duration.
There are common types of buydowns:
1-0 Buydown: The interest rate is reduced by 1% for the first year only.
2-1 Buydown: The interest rate is reduced by 2% for the first year and 1% for the second year.
3-2-1 Buydown: The interest rate is reduced by 3% for the first year, 2% for the second year, and 1% for the third year.
This calculator focuses on a simplified scenario where a fixed reduction is applied for a specified number of years (e.g., a 1% buydown for 2 years).
The Math Behind the Buydown
To understand the savings, we need to compare the total interest paid with and without the buydown. The key is to calculate the monthly mortgage payment using the standard PITI (Principal, Interest, Taxes, Insurance) formula, but we'll focus on the principal and interest (P&I) portion for this calculation. The formula for a fixed-rate mortgage payment (M) is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
P = Principal loan amount
i = Monthly interest rate (annual rate divided by 12)
n = Total number of payments (loan term in years multiplied by 12)
Our calculator performs the following steps:
Calculate the monthly interest rate: Divide the annual rate by 12.
Calculate the total number of payments: Multiply the loan term in years by 12.
Calculate the monthly P&I payment during the buydown period: Use the buydown interest rate (annual rate divided by 12) and the total number of payments in the P&I formula.
Calculate the monthly P&I payment after the buydown period: Use the original (current) interest rate (annual rate divided by 12) and the total number of payments in the P&I formula.
Calculate the total interest paid during the buydown period: (Monthly buydown payment * Number of months in buydown period) – Principal paid during buydown period. (Note: For simplicity in this calculator, we approximate this by calculating the total payment for the buydown period and subtracting the principal portion). A more precise calculation involves amortizing the loan.
Calculate the total interest paid for the full loan term without a buydown: Use the original interest rate and the full loan term.
Calculate the total interest paid for the full loan term with a buydown: Sum the total interest paid during the buydown period and the total interest paid after the buydown period using the post-buydown rate.
Calculate the total interest saved: Subtract the total interest paid with the buydown from the total interest paid without the buydown.
Who Benefits from a Mortgage Buydown?
First-Time Homebuyers: Can help ease the financial burden of initial homeownership.
Sellers/Builders: Can be an attractive incentive to close a sale, especially in a slow market.
Borrowers Expecting Income Increases: If you anticipate higher earnings in the coming years, a buydown can make the early years more manageable.
Investors: May use buydowns to improve cash flow on investment properties.
Disclaimer: This calculator provides an estimate for informational purposes only. It does not include taxes, insurance, or potential buydown fees. Consult with a mortgage professional for accurate figures and personalized advice.
function calculateMortgagePayment(principal, annualRate, years) {
if (isNaN(principal) || isNaN(annualRate) || isNaN(years) || principal <= 0 || annualRate < 0 || years <= 0) {
return 0;
}
var monthlyRate = annualRate / 100 / 12;
var numberOfPayments = years * 12;
if (monthlyRate === 0) {
return principal / numberOfPayments;
}
var payment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
return payment;
}
function calculateAmortization(principal, annualRate, years) {
var monthlyRate = annualRate / 100 / 12;
var numberOfPayments = years * 12;
var monthlyPayment = calculateMortgagePayment(principal, annualRate, years);
var totalInterest = 0;
var remainingBalance = principal;
var amortizationSchedule = [];
for (var i = 0; i < numberOfPayments; i++) {
var interestPayment = remainingBalance * monthlyRate;
var principalPayment = monthlyPayment – interestPayment;
totalInterest += interestPayment;
remainingBalance -= principalPayment;
if (remainingBalance < 0) { // Handle potential floating point inaccuracies
principalPayment += remainingBalance;
interestPayment -= remainingBalance;
totalInterest += remainingBalance;
remainingBalance = 0;
}
amortizationSchedule.push({
paymentNumber: i + 1,
principal: principalPayment,
interest: interestPayment,
remainingBalance: remainingBalance
});
}
return { totalInterest: totalInterest, monthlyPayment: monthlyPayment };
}
function calculateBuydown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var currentInterestRate = parseFloat(document.getElementById("currentInterestRate").value);
var buydownRate = parseFloat(document.getElementById("buydownRate").value);
var buydownDuration = parseInt(document.getElementById("buydownDuration").value);
var loanTerm = parseInt(document.getElementById("loanTerm").value);
if (isNaN(loanAmount) || isNaN(currentInterestRate) || isNaN(buydownRate) || isNaN(buydownDuration) || isNaN(loanTerm) ||
loanAmount <= 0 || currentInterestRate < 0 || buydownRate < 0 || buydownDuration <= 0 || loanTerm = currentInterestRate) {
alert("Buydown rate must be lower than the current interest rate.");
return;
}
if (buydownDuration >= loanTerm) {
alert("Buydown duration cannot be equal to or greater than the loan term.");
return;
}
// — Calculations —
// 1. Calculate payments and interest without buydown
var noBuydownAmort = calculateAmortization(loanAmount, currentInterestRate, loanTerm);
var interestNoBuydown = noBuydownAmort.totalInterest;
var monthlyPaymentNoBuydown = noBuydownAmort.monthlyPayment;
// 2. Calculate payments and interest during buydown period
var buydownMonthlyRate = buydownRate / 100;
var buydownMonthlyPayments = buydownDuration * 12;
var initialMonthlyPayment = calculateMortgagePayment(loanAmount, buydownRate, loanTerm); // Use the loan term to ensure consistency in formula application, though the payment itself is tied to the buydown rate.
// To accurately calculate interest during buydown and after, we need to amortize the loan in two phases.
// Phase 1: Buydown Period
var monthlyRateBuydown = buydownRate / 100 / 12;
var numberOfPaymentsBuydown = buydownDuration * 12;
var totalInterestBuydownPeriod = 0;
var principalPaidBuydownPeriod = 0;
var remainingBalanceAfterBuydown = loanAmount;
for (var i = 0; i < numberOfPaymentsBuydown; i++) {
var interestPayment = remainingBalanceAfterBuydown * monthlyRateBuydown;
var principalPayment = initialMonthlyPayment – interestPayment;
totalInterestBuydownPeriod += interestPayment;
principalPaidBuydownPeriod += principalPayment;
remainingBalanceAfterBuydown -= principalPayment;
if (remainingBalanceAfterBuydown < 0) { // Adjust for float inaccuracies
principalPayment += remainingBalanceAfterBuydown;
interestPayment -= remainingBalanceAfterBuydown;
totalInterestBuydownPeriod += remainingBalanceAfterBuydown;
remainingBalanceAfterBuydown = 0;
}
}
// 3. Calculate payments and interest after buydown period
var remainingLoanTermYears = loanTerm – buydownDuration;
var monthlyRatePostBuydown = currentInterestRate / 100 / 12;
var postBuydownMonthlyPayment = calculateMortgagePayment(remainingBalanceAfterBuydown, currentInterestRate, remainingLoanTermYears); // Calculate payment based on remaining balance and remaining term at the *current* rate.
var totalInterestPostBuydownPeriod = 0;
var remainingBalanceAfterPostBuydown = remainingBalanceAfterBuydown;
for (var i = 0; i < remainingLoanTermYears * 12; i++) {
var interestPayment = remainingBalanceAfterPostBuydown * monthlyRatePostBuydown;
var principalPayment = postBuydownMonthlyPayment – interestPayment;
totalInterestPostBuydownPeriod += interestPayment;
remainingBalanceAfterPostBuydown -= principalPayment;
if (remainingBalanceAfterPostBuydown < 0) { // Adjust for float inaccuracies
principalPayment += remainingBalanceAfterPostBuydown;
interestPayment -= remainingBalanceAfterBuydown;
totalInterestPostBuydownPeriod += remainingBalanceAfterBuydown;
remainingBalanceAfterPostBuydown = 0;
}
}
var totalInterestWithBuydown = totalInterestBuydownPeriod + totalInterestPostBuydownPeriod;
var totalSavings = interestNoBuydown – totalInterestWithBuydown;
// Display Results
document.getElementById("initialPayment").textContent = "$" + initialMonthlyPayment.toFixed(2);
document.getElementById("postBuydownPayment").textContent = "$" + postBuydownMonthlyPayment.toFixed(2);
document.getElementById("interestDuringBuydown").textContent = "$" + totalInterestBuydownPeriod.toFixed(2);
document.getElementById("interestNoBuydown").textContent = "$" + interestNoBuydown.toFixed(2);
document.getElementById("interestWithBuydown").textContent = "$" + totalInterestWithBuydown.toFixed(2);
document.getElementById("totalSavings").textContent = "$" + totalSavings.toFixed(2);
}