If you bought a Phoenix or Scottsdale home in the last two years with a 2-1 buydown, your payment is about to climb. The question is whether a refinance fixes it. Mostly, no. Freddie Mac put the 30-year average at 7.03% for the week of September 24, and Forbes Advisor listed a daily 30-year rate of 7.37% on September 29. If your note rate sits at 6.75%, today's market is above it. Here is the math on when a refinance makes sense and when it just costs you.

What actually happens when the buydown ends

Your payment steps up to the payment on your real note rate, and that is all that changes. A 2-1 buydown lowers your rate by 2 points in year one and 1 point in year two, then it is gone. The seller or builder paid for it with cash held at closing. Your rate never changed. Only who was paying the difference did.

The step up was already priced into your approval. Lenders generally qualify you at the full note rate, not the reduced one. So there is no payment shock on the underwriting side. There is only the shock on your monthly budget, which is real, and which the table below puts numbers on.

The payment step up, in dollars

Here is a $400,000 loan on a 30-year fixed with a 2-1 buydown at two different note rates. Principal and interest only. Taxes and insurance are extra.

Read the last column with care. The refinance figures assume you refinance the remaining balance after three years into a new 30-year at 7.03%. On the 6.75% loan that saves $17 a month, and it only looks like a saving because you restarted the term. With $5,500 in illustrative closing costs, the break even is over 300 months. That is a bill, not a saving.

On the 7.50% loan the story is different. You save about $207 a month and repay $5,500 in roughly 27 months. If you plan to stay longer than that, it works. The full method is in our post on the refinance break even point.

A buydown that ends is not a reason to refinance. A note rate above the market is.

A simple rule for deciding

Compare your note rate, not your reduced rate, to the rate you can get today. Your year one payment is a discount you already received. It is not the number a lender measures a refinance against. Three questions settle most cases:

• Is your note rate at least about three quarters of a point above today's rate? If not, the savings are usually too small to repay costs in a reasonable time.
• How long will you keep the home? If a move, sale or job change is likely within three years, do not pay costs you will not earn back.
• Are you counting on a refinance to fix your budget? If so, start planning the step up now. Rates can move the wrong way, and the Federal Reserve raised its target range by a quarter point to 3.75% to 4.00% this month.

If you are still in the buydown period, our guide to buying down your mortgage rate explains how the structure works, and our post on seller-paid rate buydowns in Arizona covers how the subsidy is funded.

One more trap worth naming. A new 30-year loan restarts your clock. If you are three years in and take a fresh 30-year, you are signing up for 30 more years of interest to save a small amount now. If a refinance does make sense, ask for the quote on a term that matches the years you have left, or keep paying your old payment amount on the new loan. That way the lower rate shortens your payoff instead of stretching it.

Also expect a full application. A refinance is underwritten from scratch, with income documents, a credit pull and usually an appraisal. If your income or credit has changed since you closed, the rate you see online may not be the rate you get. It is better to find that out with a quick call than after you pay for an appraisal.

If you are still inside the buydown period, there is no rush. Your payment is lower than it will ever be again, so use those months to save and to watch the rate. A refinance decision made from a calm budget beats one made in the month the step up lands.

Run your own numbers

Other ways to handle the step up

You have options besides a refinance, and some are cheaper. The right one depends on why the higher payment hurts. A short cash squeeze needs a different fix than a permanent budget gap.

• Save the difference now. If you are in year one, put the gap between your current payment and your year three payment into savings. On the 6.75% loan that is about $507 a month, $6,094 over the year. By the time the step ups hit, you have a cushion.
• Ask about a recast. If you have cash from a sale or a bonus, a lump payment and a recast can lower your payment without a new rate. Not every servicer offers it.
• Shop escrow and insurance. Homeowners insurance in Arizona has been rising. Getting new quotes can cut a few hundred dollars a year and does not touch your loan.
• Wait for a real rate drop. If your note rate is 7% or higher, your best refinance may be a future one. Set a target rate and check it against your break even instead of guessing.

If you decide to refinance, the costs are worth a look before you apply. Our post on no closing cost refinances in Arizona shows how a lender credit trades for a higher rate. The Consumer Financial Protection Bureau also has a plain-language guide to comparing loan estimates and closing costs, and the Federal Housing Finance Agency publishes national conforming loan limits and market data at fhfa.gov.

Where Metro Phoenix borrowers sit

Many buydown loans in the Valley were written for buyers in new construction communities and resale homes where sellers were paying concessions. You can see the broader picture in the Homes.com Phoenix housing market report. If you are watching prices closely, the Arizona Luxury Property Search shows what Scottsdale and Metro Phoenix homes are listed for today.

Before you apply anywhere, see how our process works and which loan programs we shop. You can also read about Blake Hermann, who will run your file himself.

Want the exact answer for your loan? Start at pillarmortgagegroup.com, book a call, or fill in the form below. I will run the numbers with you.

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