Posted on: 18th Jun, 2004 03:08 am
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:
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.
- 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.
apparently buy downs are not offerd by all lenders why is this
I guess it's not so because not all lenders want to reduce payments in the initial years of the loan. They may feel that it will affect their business.
a simple way of looking at buy downs is this...when you are refinancing or doing a purchase and you feel your rate is too high...it came back at an 8 when you wanted a 7 or what ever the case may be...the broker will buy it down by a certain amount of points....it will become that rate right away...the only bad thing about buying down...your payments will be more because when you buy down... the cost of buying down goes into your loan balance...so if you wanted a low rate but your credit was bad and it came back at a 8 the broker can buy it down for you for a certain amount of points which will reduce your rate right away so when you close you wil get that lower rate as soon as you make your first payment but for how ever many points the broker bought it down for will be added on to your loan balance...so technically you will pay more monthly...there is no way of getting around the money being added on to your loan balance...Ive had alot of ppl ask me to not added it in when i do their loan but by law you can not not add it in
yes, buy down loan is no doubt a good option but as every good thing has its negative, buy down loans also have certain disadvantages. The borrower may have the chance to qualify at a low rate but then the lender will add the subsizied amount to the unpaid loan balance.