Put simply, homebuyers who choose a buy down mortgage will pay a reduced interest rate on their mortgage as well as their monthly payments. Property sellers and builders usually offer buydown options, typically on fixed rate mortgages in order that more home buyers will qualify for mortgages and increase the chance of selling their property with the irresistible low payment plans, explains an expert from Primarynw.com.
How Exactly Does a Buy Down Mortgage Loan Work?
The reduced monthly payments and interest rates that come with a buydown mortgages are due to the cash payment that’s built-in to the loan or an advance payment that’s paid over the entire loan term. The builder, seller, or buyer makes this cash deposit. In some cases, the seller and buyer agree to split the cash payment. In general, you could choose from between a temporary buydown mortgage or a permanent buydown mortgage.
A temporary buydown mortgage is viable if you’re expecting to increase your earning capacity within several years or repay a debt that’s currently affecting your income. For instance, the 3-2-1 option will only require a payment upfront to reduce your rate during the first three years of your loan by 3%, 2%, and 1%.
With a permanent buydown mortgage, you pay extra points, which are fees you pay the lender during closing to lower your monthly payments and interest rate for the entire loan term. But you should have ample money to pay for the down payment, closing costs, and points. A point is equal to 1% of your loan amount, such that you’ll have to pay your lender $1,000 if your loan is $100,000.
Some Vital Considerations
Cash payments for temporary buydowns will be placed in escrow and utilized for supplementing monthly payments for your lender. In addition, a mortgage expert from a renowned mortgage company in Portland states that a permanent buy down might make sense if your mortgage is fixed rate and you’re planning on staying in your home until you reach that break-even period wherein your savings for monthly payments equals that of your upfront costs. Take note that buydowns don’t impact the property value or taxes, and are preferred by builders because lowering home prices also lowers the value of properties in the same vicinity.