There are so many loan options out there, and we encourage you to talk with your loan professional about your options before you pick a mortgage. But after doing settlements for the last 30 years, Foote Title Group has had a lot of exposure to the different types of loans out there, and we want to make sure you understand a little about how they work. Here’s what we’ve learned about buy-down loans.
A buy-down mortgage allows you to afford a little more home when the interest rates are higher. It’s different than an adjustable-rate mortgage where the interest rate starts low and can fluctuate throughout the life of your loan based on the terms you and the lender agreed to. Under a buy-down mortgage, you put some money aside at the beginning of the loan with the lender to supplement your payments. This lets your monthly payments be a little lower for the first three years. Here’s an example:
Let’s say the interest rate currently in the market is 10 percent, and you may buy down to the interest rate to 7 percent. The lender will tell you upfront when presenting this type of loan how much is necessary to set aside at the beginning of the loan to supplement the payments for the first year at 7 percent. You then make your payments based on the 7 percent rate, and the lender would add to your payment using the money you’ve set aside. In the second year, your rate would increase to 8 percent, and then to 9 percent in the third year.
We know what you’re thinking. “Wow, I have to put some money aside at the beginning of the loan? Where is that going to come from?” You may already have the money to cover this if, for example, the seller has agreed to pay some of your closing costs or the builder on new construction has some incentives for you. The idea is that hopefully, three years from now, you’ll be able to refinance at a lower rate instead of ultimately paying the highest of the three rates for the remainder of your original loan. The other theory behind a buy-down loan is that in three years, you’ll be making more money and able to afford a little higher payment. This loan allows you to buy more house for less money at the beginning of your loan.
We’re not mortgage professionals, so if this type of loan sounds interesting to you, it’s best to talk to your loan professional for more details. We just want to make sure you understand a little about the types of loans that are available – you’re going to come across these terms as you go about buying a house.