Buydown

Money advanced by an individual (builder, seller, etc.) to reduce the monthly payments for a home mortgage either during the entire term or for an initial period of years.

When paying points to "buy down" your intetest rate, be sure to calculate the savings over a period of time you expect to live in the home. If you plan on at least 5 years, then have your mortgage consultant run an analysis to see if the cost of the points up front will save you money over the long term. Sometimes the lower rate can save you money and sometimes it turns out to be a lower cost to keep the higher rate and save the point money.

With interest rates on the rise, this is one way that a borrower can get their interest rate lower for either the entire term or for an inital period. Borrower's can "buydown" or pay points to get their note rate lower.

Some savvy buyers will negotiate a seller paid buy down as part of their purchase contract. This is similar to using a seller concession to help with closing costs, except that the seller contributes a certain amount to help lower your interest rate. If you think a seller paid buy down is right for you be sure to mention it to your preferred mortgage professional.

Another buydown is the 3-2-1 buydown. Similiar to the 2-1 buydown but spread over a longer period of time with easier payments for the first few years. Example: Long term rate of 7%. 1st year at 4%, 2nd year at 5%, 3rd year at 6% and 4th year on at the full rate of 7%.

One of the more common buydowns is a 2-1 buydown. The first year your mortgage payments will be based on a rate that is 2% less than your long term rate, the second year the rate will be 1% less and then the 3rd year will be the full rate. Example: Your loan amount is $100,000. Your long term rate is 6.75%. Your first year payments will be based on 4.75% and your second year will be based on 5.75%. Therefore your first years payments will be $521.65, your second year the payment will be $583.57, and from the 3rd year on your payment will be $648.60.