With a buy-down mortgage, you can use your income to buy more house and pay less each month for a few years. You can pay for moving costs and furniture with the money you save on your payments. You can also get a bigger mortgage because your monthly payments are lower.
Mortgage Terms for Buying Down
There are three types of buy-down mortgages. Most people get a temporary buydown loan, which starts with a lower interest rate for one to three years and goes up to a fixed rate every year. You give the lender the difference in interest payments at the beginning of your home loan. Some lenders will pay this lump sum, but the interest rate on the loan will be higher.
For example, you can get a mortgage with an interest rate of 6% that goes down to 4% the first year, goes up to 5% the second year, and then goes back up to 6% the third year. At the time of settlement, the difference between the mortgage payments for the first two years will need to be paid to the lender.
A compressed buydown mortgage works like a temporary buydown loan, but the interest rates go up every six months. The interest rate on a permanent buydown loan stays low for the life of the loan, but the difference still has to be paid to the financing company.
Benefits of Paying Down a Mortgage
The main benefit of a buydown mortgage is that it lets you get a bigger loan based on how much money you make. This can be especially useful if you think your income will go up soon.
Also, starting out with low monthly payments lets you pay for all the costs that come with buying a home. In the first two years, the cost of moving, buying furniture, and taking care of the yard can quickly add up.
Thoughts on Buying Down Your Mortgage
Buy Along with other types of mortgages, you should think about down mortgages. If the large initial payment was part of a down payment, you may get better terms with a fixed rate or an adjustable rate mortgage (ARM). You may also find that an ARM can give you the same low monthly payments without the up-front cost if you plan to move within seven years.
No matter what kind of home loan you choose, you should look into lenders and loan terms first. Compare the interest payments and make your choice based on what you want to do with your money.
