I just got a refresher course on mortgage buydowns and am pumped about the idea. For those who aren’t familiar, a buydown is when a seller, lender, builder or buyer pays to decrease the buyer’s initial interest rate. The rate then adjusts up one point each year until it hits its final note rate (which is the rate on the note to the bank). The two most popular types of buydowns are the 3-2-1 and the 2-1. The rate does not adjust any further after the final year (which would be the end of the 3rd year for a 3-2-1 or the end of the 2nd year for 2-1). A buydown can be tacked onto any type of loan- conventional or government.

Here is a real-life example:

Buyer, who we’ll call Jane, goes under contract to purchase a home at a sales price of $146,900. Jane’s note rate is 6.625%, which is the average going rate. Jane’s wonderful Realtor negotiated to have the seller pay her buydown costs. Since we’re in a strong buyers’ market, the seller was happy to do this in order to get the home sold. Jane did a 3-2-1 buydown, which made her initial interest rate 3.625%. Such an interest rate made Jane’s payment for the 1st year just $679.99/month. Here is how it works:

This puts Jane’s monthly payment after 3 years at $954.72. Again, the rate will not adjust any further after this. Isn’t that cool?? A buydown is perfect for anyone anticipating a raise or promotion, students, buyers coming into money, or a buyer who doesn’t plan to stay in the house for more than 2 years. It is also nice for anyone who wants to save money during the first two years of homeownership.

Please let me know your thoughts and whether this all makes sense.

This entry was posted on Thursday, August 9th, 2007 at 10:28 am and is filed under Rants and Raves. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.