A buy down is an alternative financing technique where you make significantly lower payments for the first few years of the loan, and make up the difference with larger payments in the later years of the loan. The initial payments might be interest only or less than interest payments, so you can expect to pay a much larger monthly fee when you actually start working on the principal.
Loan structure
If you get a temporary buy down, the seller might provide the loan with a very low interest rate and no up front fees or points. This will make your loan package extremely cheap. Your monthly payment will be significantly smaller than the actual amount required to pay off the monthly interest and decrease the loan principal.
Then according to the contract the interest rate is increase by a small percentage each year, until your payments level off and cover both monthly interest payments and a reduction in the principal.
By the time the loan is actually paid off, you will have a very large monthly bill because all of the fees and points that you didn’t pay up front were rolled over into the loan. You didn’t skip anything you just decided to pay it all later.
Who gets buy downs?
Buys downs are perfect for the upwardly mobile. That is singles or couples who are purchasing their first home, but expect a rapid or substantial increase in their income within a couple of years.
Unlike a fixed rate mortgage your payments will be steadily increasing over the years. In addition, unlike an adjustable rate mortgage, you will find yourself paying way over market rate for the last few years of the loan.
These types of loans are usually setup as 15-year of 30-year deals. The big advantage of course is that you can get a lot of house for very little money up front. However, the seller or lender will reap a much higher rate of return on your loan than he or she should get on a fixed rate or regular adjustable rate mortgage.
It’s a great deal in the beginning, but make sure you will have the income later on to cover the large payments plus your other household expenses.
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