Buy Down mortgages come in three packages. A temporary buydown loan, the most common, starts with a discounted interest rate for one to three years that increases to a fixed rate in yearly increments. You pay the difference in interest payment in an initial payout to the lender at the start of your home loan. Some lenders will pay this lump sum, but then charge a higher interest rate for the loan.
For example, you can have a mortgage with a 6% interest rate that is reduced to 4% the first year, then raised to 5% the second year, and finally reach 6% on the third year. The difference in the mortgage payments for the first two years will need to be paid to the lender at the time of settlement.
A compressed buydown mortgage works like a temporary buy down loan, but interest rates rise every six months. A permanent buydown loan has a low interest rate for the life of the loan, but that difference still has to be prepaid to the financing company.
Buy Down Mortgage Benefits
The chief benefit of a buydown mortgage is that you can qualify for a larger loan amount based on your income. This can be especially helpful if you expect your income to increase in the near future.
In addition, initial low monthly payments allow you to pay for the many expenses associated with buying a home. The cost of moving expenses, home furnishings, and landscaping can quickly add up those first couple of years.
Buy Down Mortgage Considerations
Buy Down mortgages should be considered along with other types of mortgages. In some cases if the large initial payment was used as part of a down payment, you may find better terms with a fixed rate or ARM. You may also find that if you are planning to move within seven years, an ARM can give you the same low monthly payments without the upfront cost.
No matter what type of home loan you choose, research lenders and loan terms beforehand. Compare interest payments and base your decisions on your financial goals.
