Profiting From The Temporary Mortgage Buydown

You need a mortgage that is a small amount bigger than you can qualify for regularly and you know it won’t be a problem financially as soon as the wife returns to work next year.  You don’t intend to take any of the adjustable rate mortgage choices as rates are heading higher, so how can you have your cake and eat it too?

The answer: A Temporary Buydown Mortgage!

The where, what, how and why of buydowns will have you so mind boggled you will soon be tearing your hair out in despair.   Even more so because you are smart enough to know, you just don’t know enough.  Hopefully, this article will help you understand what you need to know about this special mortgage and you can select wisely.

First you must understand a buydown is simply a different type of payment laid on top of a standard fixed rate 30 year mortgage.  So let’s get to know how fixed rates work before moving on.

The Fixed Rate

The fixed rate mortgage is the most common and the easiest to understand in that the rate simply never changes or to put it another way, the interest on your loan remains fixed.  The repayment terms for fixed interest rate mortgages range from 10 to 30 years.  If you are fortunate enough to lock in your interest rate at a time when rates are low, no matter what changes takes place with the interest rates, your rate will be fixed.

As fixed rates go, the longer the term (Re. duration) the higher the rate.  Usually 10 and 15 year terms are about .25-.50% lower than 20-30 year terms.

Most fixed rate mortgage loans (due to having a fixed rate) also have the added predictability of having a fixed monthly payment as well.  This seems pretty easy to understand for the average mortgage shopper, so it is no wonder that most American pick a fixed rate, fixed payment mortgage.  They get it, so they choose it most often.

But there is another option with fixed rate mortgages…

The Temporary Buydown Mortgage

There is another fixed rate option which does NOT have a fixed payment.  It is called a 2-1 or 3-2-1 Temporary Buydown payment option mortgage.  These mortgages are at the core a 30 year fixed rate mortgage, but with a twist. 

The twist is simply creating a savings account, putting money in it at closing, and allowing the borrower to make smaller initial payments than the loan requires pulling the difference each month from the savings account for either two or three years.

The temporary buydown mortgage is useful for home buyers who expect to be making more money in the near future than today.  Home builders use this type of mortgage to “incentivize” home buyers to buy one of their homes fully loaded with all the options.  The temporary buydown will come back into widespread use once typical mortgage rates climb back over 8% in the coming years, since they allow buyers to qualify for more.

Here’s how a typical temporary 3-2-1 buydown works.  Let’s say standard 30 year fixed mortgage rates are running 8%.  If the mortgage amount is $200,000 then the full payment is $1467.53. 

For the first year with this type of loan you’ll pay as if the rate was 3% less or 5%.  That payment is $1073.64.  The second year you’ll pay as if it were 2% less or 6%.  That payment is $1199.10.  The third year you’ll pay at 1% less or 7%.  That payment is $1330.60.  The remaining 27 years of the mortgage you’ll pay the $1,467.53 based on 8%.

In order to do this a “savings” account called an escrow account is setting up at closing and funded with money necessary to make up the short falls in first 36 payments.  In our example the short falls are equal to the 12 x (1467.53-1073.64) + 12 x  (1467.53 – 1199.10) + 12 x (1467.53 – 1330.60) = 4726.68 + 3221.16 + 1643.16 =  $9591.00

This $9591 is called the buydown fee and it is paid for most often by the seller or the builder.  This is a wonderful way to get help with your mortgage payment in exchange for buying the sellers home.  The buyer can also pay for the fee in the form of discount points which are tax deductable…so now Uncle Sam can help even if the seller chooses not too!

I expect you can now discuss the buydown option knowledgably and pick the correct mortgage to match your needs and repayment ability.

Article Tags: Temporary Buydown, Fixed Rate

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR