| A mortgage buydown option may be the perfect answer for home owners that need smaller initial loan payments. Does that sound like you? If you are considering a buydown mortgage, here are a few tips to get you started.
A Buydown Mortgage May Make it Easier to Qualify for a Home Loan
There are a few different types of buydown mortgage products available to borrowers. Each makes lower payments possible, at least during the early years of the loan. Lower initial payments can make it easier for borrowers to qualify for a mortgage. Because buydown mortgages feature lower payments, borrowers may be able to purchase more house without earning more income.
Buydown mortgage types include:
- 2-1 buydown mortgage: the buydown mortgage rate for this common type of buydown mortgage would be 6% in the first year on an 8% loan and 7% in the second year. The reduced buydown mortgage rate results in a gap amount that the borrower pre-pays in a lump sum at closing. Under certain conditions, the lender or the builder may cover the cost.
- Financed Permanent Buydown Mortgage – lowers payments by financing discount points without incurring additional closing costs.
- Compressed buydown mortgages and 3-2-1 or 1-0 buydown mortgages are also options.
The type of buydown mortgage you choose, or even if you choose a buydown mortgage, should be weighed against your future plans. Buydown mortgages, fixed rate mortgages and adjustable rate mortgages offer different benefits and pitfalls depending upon whether you plan to be in your home for many years or just a few. Buydown mortgage options are appealing for sellers, too. Particularly in a buyers market, sellers are looking for creative ways to make the sale without sacrificing the profit margin. An interest rate buy down option can create a win-win scenario. The seller pays a price to “buydown” the interest rate, which can significantly reduce the buyer’s monthly mortgage payments. Sellers win because an interest rate buy down costs a great deal less than a home price reduction. Buyers win because although the home price is not reduced, monthly loan payments will be lower.
A Buydown Mortgage is Also Available as a Refinancing Option
A buydown refinance mortgage option allows home owners to make a lump sum payment that reduces their interest rate and builds home equity by reducing the principal loan balance. As with any type of loan home owners should check with several lenders for the best rates and terms. Buydown mortgages can be a useful tool for reducing interest expense while increasing home purchasing power. Talk with your lender about options in addition to buydown mortgages. In some cases, a buydown mortgage may not make much financial sense, especially if you can qualify for another type of mortgage loan.
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