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One of the best descriptions I could find is from Life123.com:
There are a number of mortgage options available to todayâs home buyers, including the chance to buy down mortgages.
When you buy down mortgages, you pay a lump sum to lower the interest rates on your loan. In other words, you will pay a lump sum up front so that you can make lower monthly payments on your mortgage for a set period of time.
Types of mortgage buy-downs
In general, there are two types of mortgage buy downs: permanent and temporary. If you have a permanent mortgage buy down, your mortgage will remain at a lower interest rate throughout the loanâs term. A temporary buy down will have a predetermined period of lower payments, usually one to three years, after which your mortgage will return to the original interest rate.
One popular way to buy down a mortgage is the 2-1 buy down. If the interest rate is 10%, you will pay 8% the first year, 9% the second year, and then 10% the third year and for the balance of the mortgage. In order to get a 2-1 buy down, you will have to pay the difference between the 8% and 10% interest rates for the first year and the difference between the 9% and 10% interest rates for the second year up front.
Another type of buy down is the 3-2-1 mortgage. In this loan, you will pay a 7% interest rate the first year, an 8% interest rate the second year, a 9% interest rate the third year, and then revert to 10% for the remainder of the loan. Like the 2-1 buy down, you will pay all of these differences in interest rates in a lump sum at the beginning of the loan.
A compressed, or flex fixed, buy down operates on the same principle, but works on a six-month basis rather than on a yearly basis.
Advantages to mortgage buy downs
The main advantage to buying down a mortgage is that you might be able to qualify for a more expensive home. You will also have smaller monthly payments for a predetermined period of time.
Disadvantages to buying down a mortgage
The main disadvantage of buying down a mortgage is that you will have spent cash up front that you might have been able to use elsewhere more advantageously. Some mortgage companies suggest that the lower interest rates that you pay will free up your cash flow to buy other things, such as furnishings. However, you already had that money before you paid it as a lump sum at the beginning of the loan.
When to buy down a mortgage
Because of the lump sum up front that you must pay, some experts suggest that you only buy down a mortgage if it is the only way that you can get a loan.
The best time to buy down a mortgage is when you can get your lender or builder to buy the mortgage down for you. You may have to pay a higher interest rate, but you will keep that lump sum in your pocket. Make sure you run the numbers as a buy down and as a fixed rate loan to make sure that you are getting a good deal before you sign on the dotted line.
Asking only $125
12/13/09, Moniker
Buy Down Mortgages
By: Laura Evans
By: Laura Evans
There are a number of mortgage options available to todayâs home buyers, including the chance to buy down mortgages.
When you buy down mortgages, you pay a lump sum to lower the interest rates on your loan. In other words, you will pay a lump sum up front so that you can make lower monthly payments on your mortgage for a set period of time.
Types of mortgage buy-downs
In general, there are two types of mortgage buy downs: permanent and temporary. If you have a permanent mortgage buy down, your mortgage will remain at a lower interest rate throughout the loanâs term. A temporary buy down will have a predetermined period of lower payments, usually one to three years, after which your mortgage will return to the original interest rate.
One popular way to buy down a mortgage is the 2-1 buy down. If the interest rate is 10%, you will pay 8% the first year, 9% the second year, and then 10% the third year and for the balance of the mortgage. In order to get a 2-1 buy down, you will have to pay the difference between the 8% and 10% interest rates for the first year and the difference between the 9% and 10% interest rates for the second year up front.
Another type of buy down is the 3-2-1 mortgage. In this loan, you will pay a 7% interest rate the first year, an 8% interest rate the second year, a 9% interest rate the third year, and then revert to 10% for the remainder of the loan. Like the 2-1 buy down, you will pay all of these differences in interest rates in a lump sum at the beginning of the loan.
A compressed, or flex fixed, buy down operates on the same principle, but works on a six-month basis rather than on a yearly basis.
Advantages to mortgage buy downs
The main advantage to buying down a mortgage is that you might be able to qualify for a more expensive home. You will also have smaller monthly payments for a predetermined period of time.
Disadvantages to buying down a mortgage
The main disadvantage of buying down a mortgage is that you will have spent cash up front that you might have been able to use elsewhere more advantageously. Some mortgage companies suggest that the lower interest rates that you pay will free up your cash flow to buy other things, such as furnishings. However, you already had that money before you paid it as a lump sum at the beginning of the loan.
When to buy down a mortgage
Because of the lump sum up front that you must pay, some experts suggest that you only buy down a mortgage if it is the only way that you can get a loan.
The best time to buy down a mortgage is when you can get your lender or builder to buy the mortgage down for you. You may have to pay a higher interest rate, but you will keep that lump sum in your pocket. Make sure you run the numbers as a buy down and as a fixed rate loan to make sure that you are getting a good deal before you sign on the dotted line.
Asking only $125
12/13/09, Moniker
