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How to Get a Buydown Mortgage

What it is

A buydown mortgage comes in two forms — a temporary buydown mortgage and a permanent buydown mortgage. In any buydown mortgage, the borrower can lower the interest rate by paying a large sum of cash to the lender. The decrease is always measured in points. One point is one percent of the principal amount of the mortgage. For instance, one point on $100,000 is $1,000.

In a temporary buydown, a borrower can expect to have a significant increase in income over the coming years. It lowers the interest rate and the monthly payments for the first few years of the loan. The most common type of temporary buydown is the 3-2-1 buydown. For instance, an eight percent loan with a 3-2-1 buydown would have a five percent interest rate the first year, a six percent interest rate the second year, a seven percent interest rate the third year, and an eight percent interest rate beginning the fourth year through the life of the loan. This type of buydown will generally cost three to four points, or $3,000 to $4,000 on a $100,000 loan. A permanent buydown lowers the interest rate for the life of the loan. This type of buydown will generally cost six to eight points and will reduce the interest rate by one percent for the life of the loan.

Who it's for

Buydown mortgages are for people do not want to make high monthly payments every year. The buydown mortgage lowers monthly payments and makes a house more affordable in the short term. This type of mortgage is for people who expect to have more income in the future.

What you need to do to apply

In order to obtain a buydown mortgage, interested borrowers should contact a lending institution and inquire about this specific type of mortgage. Banks will need confidence of repayment, a credit report, and other personal and financial information.

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