You might investigate a buy-down mortgage if you don’t quite meet lender income requirements. Homebuyers who choose the buy-down option pay lower interest rates on home loans and lower monthly payments. Builders and home-sellers offer buy-down options, usually on fixes-rate loans, to qualify more buyers for loans and increase sale potential with the low-payment incentive. The different types of buy-down mortgage types and plans are designed to accommodate your financial needs, including income, expenses and debt.
The low monthly payments available with a buy-down mortgage are possible because a cash deposit is made either as an advance payment or as an amount that is built into the mortgage and paid over the life of the loan. The process requires a cash payment paid to the lender by the buyer, seller or builder. Sometimes the buyer and seller agree to share the cost of the advance cash payment. The two types of buy-down mortgages, temporary and permanent, are designed to meet different financial needs.
The temporary buy-down option works well if you expect to increase your earnings in a few years or pay down a significant debt that currently ties up income. The 3-2-1 plan, for example, requires an upfront payment that reduces the interest rate in the first, second and third years by 3, 2 and 1 percent, respectively.
Buyers who choose the permanent buy-down pay additional points, which are the fees paid at closing to the lender, to reduce the interest rate and the monthly payment for the life of the loan. You must have enough cash on hand to pay for the points, down payment and closing costs. One point equals 1 percent of the amount of your home loan, or $1,000 per $100,000. For instance, you would pay the lender $2,500 on a $250,000 mortgage. Lenders vary in the rate reductions applied to points.
The cash advance payment for the temporary buy-down is placed in an escrow account and used to supplement your monthly payments to the lender. Although you make reduced payments during the buy-down period, the lender receives payment amounts as expected without a buy-down. According to Bank of America, a permanent buy-down that involves the purchase of points works best if you have a fixed-rate mortgage and you plan to stay in the home long enough to reach the break-even period when your monthly payment savings equal your upfront cost. Builders often prefer buy-downs to lowering the price of homes, which can lower the value of other property in the area. A buy-down does not affect property value or property taxes.
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