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A mortgage buy down is an arrangement where the lender and the debtor utilize one or more strategies to make the payments more affordable over the long term. In some cases, the focus is on obtaining a lower rate of interest that applies to the total amount loaned. At other times, the process requires a larger initial payment from the debtor. Depending on the terms of the arrangement, the buy down may be in effect for a specified period during the life of the mortgage, or for the entire duration of the mortgage.
One of the more common ways for a mortgage buy down to function has to do with the extension of discount points to the lender. In exchange for those points from a builder or the buyer, the lender offers lower interest rates on the mortgage agreement. In some cases, the discount points allow the buyer to obtain mortgage interest rates that are below current market levels. At other times, the discount points simply allow the buyer to receive a lower interest rate than his or her credit rating would allow.
Another approach to a mortgage buy down involves the buyer submitting a substantial lump sum payment at the beginning of the mortgage. In exchange for this payment, the lender extends lower interest rates that may apply to the first several years of the mortgage loan, or even for the entire life of the mortgage. This can be especially helpful for buyers who can manage the lump sum payment, as it usually makes it possible to enjoy lower monthly installment payments as well as a significantly lower rate of interest.
The buyer is not the only one who benefits from the execution of a mortgage buy down. Because of the accumulation of discount points or the lump sum payment that is provided at the beginning of the mortgage period, the mortgage broker can often provide more loan options to the buyer, increasing the chances of securing a new customer. Others involved in the real estate deal, such as builder, may also find that the arrangement works well in terms of expediting the accumulation of resources to complete the project.
While there are several good points to a mortgage buy down, not everyone will find this type of financial arrangement to their liking. Brokers and other lenders still tend to require that the buyer have acceptable credit, even if he or she has resources to make a sizable lump sum payment at the onset of the transaction. In addition, the buyer may find that the difference in interest rates or the size of monthly installments is not large enough to merit making the lump sum payment.
@Latte31 - I think that it is great that programs like this exist but I am a little old fashioned and think that it is better to put the 20% down payment because in this market the real estate values are really volatile and you could lose equity and actually owe more than your property is worth if you put down less than 20% down.
I think that buying a house is a big commitment and you should really take your time and ask all of the mortgage questions that you have of your mortgage broker to make sure that you are comfortable with your mortgage payment.
I recently read that your housing costs should not exceed 30% of your take home pay.
I agree that with the interest rates so low it really does not make sense to try to get a buy down mortgage. I know that there are a lot of other mortgages like an FHA mortgage or a Homepath mortgage by Fannie Mae that offer interest rates that are still favorable and in some cases the buyer still only has to come up with a 3% down payment.
I know for bank owned properties owned by Fannie Mae they will offer their Homepath mortgage which allows the owner occupant or investor the opportunity to buy the property with only 3% down and does not require private mortgage insurance which is a real plus.
I looked into a few properties that I was interested in buying and they do make the terms pretty favorable for anyone looking into buying a house.
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