A buy-down mortgage gives you a way to decrease your monthly loan repayments by paying more money upfront. The buy-down includes your principal and interest in its monthly payments. You, therefore, decrease your loan balance and grow your home equity even in times of low real estate appreciation.
Most builders offer buy-downs through a local mortgage lender in Tempe to encourage more people to buy homes. Buy-downs also enable buyers with less income to own houses. Here are the three main types of buy-down mortgage:
2-1 buy-down mortgage
This is a type of temporary buy-down mortgage in which the interest rate increases for the initial two years. In the first year, your interest rate is 2% lower than your overall 30-year interest rate. In the second year, your rate is 1% below the 30-year interest. The rate then reverts to your original 30-year interest rate for the remaining period.
3-2-1 buy-down mortgage
In this mortgage, your interest increases by 1% for the first three years, after which you pay the set interest for your remaining term. The rate is 3% lower in the first year, 2% in the second year, and 1% lower in the third year. A 3-2-1 mortgage, however, requires a higher down payment compared to a 2-1 mortgage.
Permanent buy-down mortgage
In permanent buy-down, the borrower pays additional points to decrease the interest rate for the loan’s lifetime. This amount is typically paid at the closing of the mortgage. One point is equal to 1% of the mortgage amount. For instance, you pay $2,500 for a $250,000 mortgage. Lenders, however, vary in the rate reductions they apply to points.
Temporary buy-down mortgages such as 3-2-1 and 2-1 work best for those expecting additional income after some years. These include students, those paying off other loans, and workers expecting a promotion. Permanent buy-downs, on the other hand, work for fixed-rate mortgages and if you plan to stay in your home for a long time.