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What is a Buydown Mortgage?

Posted by RCPAP on January 8, 2016
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As a buyer in the market, you’ll find there are many different mortgage options available to you. A buydown mortgage is one such option. This option can help you reduce your interest rate either temporarily or permanently. In this article, we’ll go over the two different options you have for a buydown mortgage so you know exactly how a buydown mortgage works.
What is a Buydown Mortgage?
A buydown mortgage is when you pay an initial lump sum to “buy down” the interest rate on your loan. This allows you to qualify for larger loan amounts based on your income, because your monthly payments will be lower.
Basically, a buydown mortgage is when you pre-pay your interest upfront. There are two types of buydown mortgages: Temporary and permanent.
What is a Temporary Buydown Mortgage?
Just as the name implies, a temporary buydown mortgage is when you buydown your mortgage for a specific period of time.
The most common way to do this is the 1-2-3 method. This means the buyer pays 3% less than the usual interest rate the first year, 2% the second, and 3% the third. Of course, the terms are usually negotiable and you can buy down even more if you choose to.
The temporary buydown mortgage is great because it can help you reduce your monthly payments for the first three years of moving into a new home. This can help offset the costs of moving expenses, furnishings, building costs, etc.
What is a Permanent Buydown Mortgage?
Again, just as the name implies, a permanent buydown mortgage is a buydown mortgage that allows you to pay upfront for the entire loan.
Keep in mind that you’ll still have to pay the interest either way. In this case, you’re just paying it upfront.
In a “buyer’s market,” it’s not uncommon for sellers to try and entice buyers by offering a permanent buydown mortgage.
You now know what a buydown mortgage is, its benefits and how it works. Knowing your options is a big part of choosing a loan. No matter what you choose, it’s important to speak with a local professional in person. So if you have any mortgage questions, I will me more than glad to answer you queries. Call me on my cell at 404 374 1620 or email me at craig@pauldingandpolk.com

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