A mortgage rate buydown is a financial strategy used to temporarily lower the interest rate on a home loan, making monthly payments more affordable during the initial years of the mortgage. This is typically achieved by the borrower, seller, or builder paying a fee upfront to the lender, which in turn reduces the interest rate for a specified period.
How Rate Buydowns Work
Lenders offer different types of buydowns:
2-1 Buydown: The interest rate is reduced by 2% in the first year, 1% in the second year, and then settles at the original note rate for the remaining term.
1-0 Buydown: The interest rate is reduced by 1% in the first year and then settles at the original note rate for the remaining term. This is often referred to as a "temporary buydown."
Custom Buydown: Allows for specific rate reductions over custom periods, offering flexibility to meet individual financial needs.
The upfront cost of a buydown is calculated based on the difference in monthly payments over the buydown period, plus any administrative fees. The goal is to determine if the savings from lower initial payments outweigh the upfront cost.
The Math Behind the Calculator
Our calculator helps you analyze the financial implications of a mortgage rate buydown. Here's a breakdown of the calculations:
1. Monthly Principal & Interest (P&I) Calculation:
The standard monthly P&I payment for a fixed-rate mortgage is calculated using the following formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
M = Monthly Payment
P = Principal Loan Amount
i = Monthly Interest Rate (Annual Rate / 12)
n = Total Number of Payments (Loan Term in Years * 12)
2. Buydown Rate Calculations:
For a buydown, we first determine the effective interest rates for the buydown period:
Year 1 Rate: Current Rate – Year 1 Reduction (or 2% for 2-1, 1% for 1-0)
Year 2 Rate: Current Rate – Year 2 Reduction (or 1% for 2-1, 0% for 1-0)
Note Rate: The original Current Interest Rate.
These are then converted to monthly rates (i1, i2, inote) for the P&I formula.
3. Monthly Payment During Buydown:
Year 1 Monthly Payment: Calculated using M = P [ i1(1 + i1)^n ] / [ (1 + i1)^n – 1]
Year 2 Monthly Payment: Calculated using M = P [ i2(1 + i2)^n ] / [ (1 + i2)^n – 1]
(Note: The formula uses the total loan term 'n' for payment calculations, even though the rate is temporarily reduced.)
4. First Year Monthly Savings:
This is the difference between the monthly payment at the note rate and the monthly payment during the first year of the buydown.
This sums the savings across all years affected by the buydown.
Savings (Year 1): Calculated as above.
Savings (Year 2): (Monthly Payment at Note Rate) – (Monthly Payment at Year 2 Buydown Rate).
Total Savings = Savings (Year 1) + Savings (Year 2)
6. Break-Even Point:
This indicates how many months it takes for the cumulative savings from the lower initial payments to equal the upfront cost of the buydown.
Break-Even Point (Months) = Total Buydown Cost / Monthly Savings (Year 1)
When is a Buydown a Good Idea?
A rate buydown can be particularly beneficial in the following scenarios:
Rising Interest Rate Environment: If you anticipate rates will fall in the future, a buydown allows you to secure a home now and potentially refinance later at a lower rate.
Adjustable-Rate Mortgages (ARMs): Buydowns can make the initial fixed period of an ARM more appealing.
First-Time Homebuyers: The temporary relief from higher initial payments can be crucial for buyers managing new, often higher, housing expenses.
Shorter Ownership Horizon: If you plan to sell the home or refinance before the buydown period ends, you can benefit from the reduced payments without ever paying the full note rate.
It's essential to weigh the upfront cost against the projected savings and consider your long-term financial plans and expectations for future interest rate movements.
function calculateMortgagePayment(principal, annualRate, years) {
var monthlyRate = (annualRate / 100) / 12;
var numberOfPayments = years * 12;
var payment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
return isNaN(payment) ? 0 : payment;
}
function calculateBuydown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var currentRate = parseFloat(document.getElementById("currentRate").value);
var buydownCost = parseFloat(document.getElementById("buydownCost").value);
var buydownType = document.getElementById("buydownType").value;
var rate1Reduction = 0;
var rate2Reduction = 0;
if (buydownType === "2-1") {
rate1Reduction = 2.0;
rate2Reduction = 1.0;
} else if (buydownType === "1-0") {
rate1Reduction = 1.0;
rate2Reduction = 0.0;
} else if (buydownType === "custom") {
rate1Reduction = parseFloat(document.getElementById("rate1").value);
rate2Reduction = parseFloat(document.getElementById("rate2").value);
}
if (isNaN(loanAmount) || isNaN(loanTerm) || isNaN(currentRate) || isNaN(buydownCost)) {
alert("Please enter valid numbers for all fields.");
return;
}
var monthlyNoteRatePayment = calculateMortgagePayment(loanAmount, currentRate, loanTerm);
var noteRate = currentRate;
var effectiveRate1 = Math.max(0, noteRate – rate1Reduction);
var effectiveRate2 = Math.max(0, noteRate – rate2Reduction);
var monthlyPayment1 = calculateMortgagePayment(loanAmount, effectiveRate1, loanTerm);
var monthlyPayment2 = calculateMortgagePayment(loanAmount, effectiveRate2, loanTerm);
var firstYearMonthlySavings = monthlyNoteRatePayment – monthlyPayment1;
var totalBuydownSavings = 0;
var breakEvenPoint = "N/A";
if (buydownType === "2-1") {
totalBuydownSavings = (monthlyNoteRatePayment – monthlyPayment1) + (monthlyNoteRatePayment – monthlyPayment2);
} else if (buydownType === "1-0") {
totalBuydownSavings = (monthlyNoteRatePayment – monthlyPayment1);
} else if (buydownType === "custom") {
// For custom, we assume savings only from the specified rate reductions.
// A more complex calculator might handle custom periods differently.
var monthsInRate1 = 12; // Assuming standard 1-year reduction periods for custom
var monthsInRate2 = 12; // Assuming standard 1-year reduction periods for custom
var savingsYear1 = (monthlyNoteRatePayment – monthlyPayment1) * monthsInRate1;
var savingsYear2 = (monthlyNoteRatePayment – monthlyPayment2) * monthsInRate2;
totalBuydownSavings = savingsYear1 + savingsYear2;
}
var displayMonthlySavings = firstYearMonthlySavings > 0 ? firstYearMonthlySavings.toFixed(2) : "$0.00";
var displayTotalSavings = totalBuydownSavings > 0 ? totalBuydownSavings.toFixed(2) : "$0.00";
if (firstYearMonthlySavings > 0) {
breakEvenPoint = Math.ceil(buydownCost / firstYearMonthlySavings);
} else {
breakEvenPoint = "N/A";
}
document.getElementById("monthlySavings").innerText = "$" + displayMonthlySavings;
document.getElementById("totalSavings").innerText = "$" + displayTotalSavings;
document.getElementById("breakEvenPoint").innerText = breakEvenPoint;
document.getElementById("result-container").style.display = "block";
}
function resetForm() {
document.getElementById("loanAmount").value = "";
document.getElementById("loanTerm").value = "";
document.getElementById("currentRate").value = "";
document.getElementById("buydownCost").value = "";
document.getElementById("buydownType").value = "2-1";
document.getElementById("rate1").value = "2.0";
document.getElementById("rate2").value = "1.0";
document.getElementById("result-container").style.display = "none";
document.getElementById("customBuydownRates").style.display = "none";
}
document.getElementById("buydownType").addEventListener("change", function() {
if (this.value === "custom") {
document.getElementById("customBuydownRates").style.display = "block";
} else {
document.getElementById("customBuydownRates").style.display = "none";
}
});
// Initialize visibility for custom rates on page load if default is custom (though not default here)
if (document.getElementById("buydownType").value === "custom") {
document.getElementById("customBuydownRates").style.display = "block";
}