 Sam
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Joined: 21 May 2005
Posts: 281
Location: CALIFORNIA
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 Posted: Fri Jun 18, 2004 3:08 am Post subject: Buy Down Mortgage |
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Buy down mortgage is a kind of mortgage in which the monthly payments are subsidized for an initial period or for the entire loan term. The borrower pays greater points (1point = 1% of loan amount) or escrow fees to reduce the interest rate either on a temporary basis or permanently. In case of temporary buy down, the original interest rate is applied after the buy down period.
There are various kinds of temporary buy down mortgages. These are 3-2-1 buy down, 2-1 buy down and 1-0 buy down mortgages. In case of 3-2-1 buy down, the interest rate in the first year decreases by 3%, in the second year by 2% and in the third year by 1%. In the 4th year the rate applied is equal to the note rate and it remains so till the life of the loan. Similarly, in case of 2-1 buy down mortgage, the rate reduces by 2% in the first year and 1% in the second year. From the third year, the rate becomes equal to the note rate. But in case of 1-0 buy down, the rate reduces by 1% in the first year and from the second year onwards, it follows the note rate.
For example, Robert takes a mortgage of $200,000 for 10 years at 8% rate of interest. If the lender offers 3-2-1 buy down, then in the 1st year, the rate decreases by 3%, that is, the rate is 5%. In the second year, the rate reduces by 2%, that is, it becomes 6% and in the 3rd year the rate decreases by 1%, that is, the rate will be 7%. From the 4th year onwards the rate will be 8% till the life of the loan.
Features:
- The mortgage can be fixed rate or adjustable rate mortgage after the buy down period is over.
- Lenders and home sellers often contribute towards the buy down.
- It helps in purchasing investment properties and second homes.
Benefits:
- It helps those who need a big loan but may not be able to make monthly payments for the first few years of the loan.
- Buy down mortgages benefit both lenders and borrowers. The former gets back his money and more from the higher rate allowed after the buy down period. The borrower gains by qualifying for the loan because of low interest rates.
- The Permanent buy down option helps borrowers who are retired, have fixed income or dont want large payments for the next few years.
A buy down mortgage may be beneficial to borrowers as it reduces monthly payments for a certain period. But buyers often have problem in paying down payment and closing costs, so they find it impossible to pay extra cash to buy down the interest rate. |
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