« Arizona Home Sellers - PRICE DOES MATTER! | Main | AZ Appraisals Still Coming in Too Low for Sellers » Wednesday, May 09, 2007Understanding Mortgage Buydown ProgramsWith home prices where they are these days the 2-1 buydown in loan programs are becoming increasingly popular. In a buyers market, such as the one we’re in at the moment, you can even structure a buydown so that the seller pays for the buydown and closing costs. This means as a buyer you can expect a lower monthly payment with no out of pocket expense to close on the house. What a steal! The 3-2-1 program works the same way except it’s over three years. I’ll focus on the 2-1 program here for simplicity (you’ll see why in the example I use). The basic idea behind a buydown is to lower the monthly payment during the first few years of the mortgage. It is not to be confused with a discount point where you buy down the rate. Discount points are usually expensive, especially if you consider the break even point! I rarely advise borrowers to pay discount points, however, a buydown is a radically different concept and I would suggest you take advantage of it, if you qualify. How does a buydown work? Loan size: $200,000 Second Year: Monthly payment at 5.5% (interest only) = $ 916 Total shortage over two years = $6,000 (this is the amount deposited in the escrow account) 6% seller contribution on a $200,000 purchase = $12,000 So if you can negotiate a 6% seller contribution you then allocate $6,000 to go towards the buydown and the remainder towards closing costs. Depending on your loan to value (LTV) and credit score you could even qualify for the loan at the lower rate! One caveat is that the loan program needs to allow 6% seller contribution, as not all programs allow such a high level. Buydowns are great for first time homebuyers expecting increased income down the road or those in jobs with income variability. Make sure you’re working with a qualified mortgage professional, as you can see, it can get costly if you don’t!
Posted by Shailesh Ghimire, AZ Mortgage Guru on May 9, 2007 | Permalink CommentsNice job describing buy downs. I am seeing more and more of this as a perk from the seller to get buyers to make an offer. The dust is coming off the books for creative lending. Posted by: Doug Trudeau | May 14, 2007 7:00:18 AM Greetings, Nice Posted! Its so very informative and knowledgeable for your visitors or readers.
Posted by: Freddie Aguilar | May 16, 2007 10:47:43 AM Shailesh, we selected your blog as the best real estate blog in Arizona (most recent post). We created an award ribbon if you’d like, just drop me a line. Henry Posted by: Henry | May 23, 2007 3:07:05 PM The comments to this entry are closed.
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