What exactly is an interest-rate buy down?
• To start with, an Interest rate buy down is a tool that helps people qualify for a larger loan amount than they would otherwise be qualified to buy.
• A buy down allows consumers to pay points up front in return for lower interest rates - just for the first few years. These extra points are tax deductible.
• When people must relocate for employment reasons, they can definitely use the buy down option because employers will usually the extra points as part of their relocation package.
• Interest rate buy downs are a considered to be a financing technique that’s used to reduce the monthly payments during the first few years of the loan.
• With some of the buy down plans, the seller may make subsidy payments in the form of points, to the lender that "buy down," or lower, the interest rate paid by the borrower.
Are there different types of buy downs?
• The most common type of buy down is the 2-1 buy down, which usually costs an additional 3 points above the current points. During the first year of the mortgage, the rate is reduced by 2% the first year and 1% the second year.
• Another option is the 3-2-1 buy down. This one reduces the mortgage rate by 3% the first year, 2% the second and 1% the third year. After that the buyer pays the full rate.
• Other programs are called “flex-fixed” buy downs. These increase the interest in six-month intervals instead of yearly intervals.
For more information on buy down loans or other loan options, contact me.