A Buy Down is a type of loan and certainly your loan professional can give you a whole lot more information than I, but from the experience that we’ve had over the last 30 years doing settlements, we have a lot of exposure to a lot of these terms so that’s why we’re just throwing some of this out there.
So a Buy Down Mortgage is a mortgage that allows you, when the interest rates are a little bit higher, to afford a little more home. When we talked last about an Adjustable Rate Mortgage, theAdjustable Rate Mortgage is where your interest rate starts at a low rate and can fluctuate through the full life of the loan based on some terms that you agreed to it the lender. Where a Buy DownMortgage you actually put some money aside at the very beginning of the loan with the lender to supplement your payments. This allows your monthly payment as you’re making the payments be a little lower for the first three years. So typically let’s say the interest rate currently in the market is 10% and you may buy down the interest rate to 7%. So the lender will tell you up front when presenting this loan type the amount of money that is necessary to set aside at the beginning of the loan to supplement those payments for the first year you’d be at 7%. Then as you make a payment based on that 7% rate the lender would add to payment out of that savings account that you will set aside.
So you might be saying “ wow I have to put some money aside at the beginning of the loan? Where is that going to come from?” but if the seller agrees to pay some closing for you or if you’re buying a new home the builder may have some incentives that may cover this. Then hopefully three years from now you’ll be able to refinance at a little bit lower rate instead of ultimately paying the highest of the 3 rates for the remainder of the loan. Logistically the theory is that you’ll be making some more money and you’ll be able to afford a little bit more of a payment. So it allows you to buy more house for less money at the beginning.
Like I said your mortgage professional is going to be much more qualified to give you a lot more details about that we’re just throwing out some information to try to give you some nuggets of where some of these words come from what some of them mean if something gets thrown at you so you have a little more exposure.