If you've found your dream house, you'll need to make a final decision for a loan to pay for the dream. (Unless, of course, you're wealthy enough to pay cash for all of your dreams. If you're not, lenders offer a variety of mortgage products tailored to your specific economic conditions and your personal budget. Beyond the basics of a fixed or adjustable loan, lenders also have programs to buy down your interest to make your loan payments more manageable. Buying down, however, sometimes involves an extra cash payment.
Lenders offer loans to make money. As a borrower, you can pay now or you can pay later, but you always end up paying a significant amount for interest over the course of the loan. Fixed rates require you to make the same monthly payment using the same interest rate through the term of the loan agreement -- typically 15 or 30 years. Adjustable-rate loans change at set periods of time specified in the loan contract. The rate generally is tied to an economic marker -- such as the interest on federal Treasury notes. Loan agreements for adjustable-rate loans include term agreements specifying anything from 1-year to 30-year lending contracts. ]
A loan buy-down agreement creates a period when you pay a reduced rate for your monthly mortgage payments. The buy-down helps some borrowers qualify due to the lower income-to-payment level. If you expect extra income in later years or have a current home on the market also requiring monthly payments, buy-down agreements help you qualify for the new loan. Homebuilders occasionally offer buy-down loans as an incentive to home shoppers. The federal government also offers buy-down agreements at times. The programs, such as Freddie Mac loans, jump-start the economy during economic downturns to increase home sales. The attractive lending offers spur homebuyers who might not normally qualify for standard loans. In the cases of builder offers, you typically pay nothing for the loan buy-down arrangement.
Buying points is one form of buying down the loan agreement. A point, occasionally called a "discount point," is 1 percent of the interest on your loan. You, as the borrower, buy points to permanently lower, or buy down, the interest rates on your home mortgage. The prepaid interest payment of one point permanently lowers the interest rate on your mortgage loan.
Temporary Lender Agreements
Temporary lender buy-down agreements offer the greatest borrower risk. Short-term buy-down loans lower your interest rate and then the rate increases to the normal contract rate. Other loans increase your interest rate each year until you reach your final contract interest. If you count on a salary increase or inheritance that doesn't arrive, you still have the rate increase according to your loan contract. Some agreements simply terminate at the end of the buy-down period requiring you to find a new mortgage at the going interest rates. This requires using an amount of speculation to determine the future interest rates when your temporary buy-down agreement expires.
- Freddie Mac: The Flexible Power of Temporary Subsidy Buydown Plans
- Wells Fargo: Flex/Fixed
- Realty Times: Should You "Buy Down" Your Next Loan?
- California Housing Finance Agency: Homeownership Program Bulletin
- Freddie Mac: Frequently Asked Questions
- IRS: Topic 504 -- Home Mortgage Points
- Loan Officer Magazine: Creating More Business from Realtors and Builders Using Temporary Buy Downs -- Part 2
- U.S. Department of Housing and Urban Development: 100 Questions and Answers About Buying a New Home
- Digital Vision./Digital Vision/Getty Images
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