Home Mortgage Essentials: Understanding Buydowns
Buydown Basics
In the simplest sense, a buydown is a way of purchasing
a lower interest rate—and thereby reducing monthly
payments—for a certain amount of time. The borrower
does this either by paying discount points to the lender
toward the interest rate, or by a large payment to the lender
for the purpose of bringing down monthly payments.
Lump Sum Payments
While the lump sum payment for reducing the monthly mortgage
payments for the borrower usually last only for a few years,
the discount point buydown can last for the life of the
loan. Often this is done when a borrower can’t qualify
for a loan at a certain interest rate, but has some money
in pocket. This allows the borrower some wiggle room, and
to take advantage of future possible events, such as employment
raises and bonuses.
What Really is Happening
Although it seems more like the buyer is simply paying
off some of the principal, what’s really happening
is that the lender holds the money paid for the discount.
This money is used as an addition to the borrower’s
monthly payment, and when it’s gone the interest rate
returns to the rate on the original loan documents.
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