Do you want lower monthly payments? Have you considered a buy down mortgage? A buydown mortgage allows you to buy more house with your income and enjoy low monthly payments for a couple of years. With reduced payments, you can pay for move-in costs. You also qualify for a larger mortgage due to lower monthly payments.

What is a Buydown?

A buy down is a mortgage refinancing technique in which some money is paid upfront in order to temporarily lower the interest rate on mortgage and to lower the monthly mortgage payments. Typically, the seller of the property provides this payment to the lender. The lender, in return, lowers the interest rate on the mortgage which reduces the monthly mortgage payments for the buyers. The seller of the property, however, increases the purchase price of the property in order to compensate the costs of the buy down mortgage agreement.

Buydown Mortgage Terms

Buy Down mortgage terms can be structured in various ways. However, most buy down mortgage agreements last for only a few years. After that, the mortgage interest rate and the monthly mortgage payments increase by a standard rate. 3-2-1 and 2-1 mortgage buydowns are the two most popular buydown structures

3-2-1 Buydown Mortgage

In a 3-2-1 Buydown mortgage, the home buyer pays lower monthly mortgage payments for the first three years. Typically, the seller contributes to the buydown agreement to offset these monthly payments for the lender. For example, on a fixed-rate mortgage having a 6% interest rate with a 3-2-1 buydown mortgage, the monthly payments will reduce in the first three years. Thus with a 3-2-1 buydown, the buyer will pay an interest rate of 3% for the first year, 4% for the second year, and 5% for the third year. After three years, the buyer will pay the standard 6% interest rate on the home loan for the rest of its duration.  The difference in the monthly mortgage payments for the duration of the buydown agreement is paid by the seller to the lender.

2-1 Buydown Mortgage 

In a 2-1 buydown mortgage, the buyer pays lower monthly mortgage payments for the first two year of the mortgage term. A 2-1 buydown is structured just like a 3-2-1 buydown. For example, in a fixed-rate home mortgage with a 6% interest rate on it, the buyer will pay an interest rate of 4% in year one, and 5% in year two. After the first two years, the buyer will pay the standard interest rate of 6% on the home loan for the rest of its term. To offset the monthly payments for the first two years, the seller makes subsidy payments to the lender in exchange for an increased purchase price.

Buydown Types

A temporary buydown loan 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 monthly 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.

A compressed buydown mortgage works like a temporary buydown loan, but interest rates rise every six months. A permanent buydown loan has low-interest rate for the life of the loan, but that difference still has to be prepaid to the financing company.

What are some benefits of the Buydown 

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 that first couple of years.

Buydown 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.

Are you ready to buy?

Check out the Affiliated Morgage Calculator and figure out how much you can afford on a monthly basis. This is an excellent way to get started before talking with a Loan Officer about the different buy down options that could lower your monthly payment.

If you haven’t noticed, market rates are low and it is an excellent time to buy!

Do you want lower monthly payments? Have you considered a buy down mortgage? A buydown mortgage allows you to buy more house with your income and enjoy low monthly payments for a couple of years. With reduced payments, you can pay for move-in costs. You also qualify for a larger mortgage due to lower monthly payments.

Buy Down Mortgage Terms

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 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 that 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.

Are you ready to buy?

Check out the Affiliated Morgage Calculator and figure out what how much you can afford on a monthly basis. This is an excellent way to get started before talking with a Loan Officer about the different buy down options that could lower your monthly payment.

If you haven’t noticed, rates are low and it is an excellent time to buy!

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