QandAs: Loans

What is a Buydown Mortgage?

Answer:
Due to the complexity of home loans, buyers ought to

consult an experienced mortgage expert before applying for a mortgage. Nearly all buyers are aware of popular mortgage options that offer zero down loans, closing cost assistance, and more. Further, there are mortgage alternatives that offer low initial payments and buyer discounts. One such option is a buydown mortgage.

A buydown involves a buyer or seller offering an initial lump sum payment which reduces the mortgage interest rate. This essentially involves prepaying interest. Lower interest rates equal a lower monthly obligation. In many cases, this is the only way a buyer can afford a particular home. There are two types of buydown mortgages: temporary buydown and permanent buydown.

Temporary buydowns make it possible for borrowers to acquire a lower interest rate during the initial payment years. This option appeals to persons who cannot qualify for a lower rate. A typical mortgage buydown is the 3-2-1 option. This entails the borrower paying an interest rate 3% below the full rate in the first year; 2% in the second year; and 1% in the third year. Borrowers pay the full interest rate in year four.

Permanent buydowns also entail paying points for a lower rate. However, the seller or new construction builder pays the points. Unlike temporary buydowns, which are good for only a few years, permanent buydowns benefit buyers for the duration of the loan. Builders and sellers normally propose permanent buydowns to entice buyers.