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Buy Down
A buy down refers to borrower paying more upfront in order to reduce the monthly payments of the mortgage.
It is further categorized in to permanent and temporary buy down.
The former refers to an arrangement that last for the life of the loan, while the later only last for the initial years.
A permanent buy down is usually in the form of the borrower paying more points to the lender and in return, get a lower interest rate.
A temporary buy down requires a borrower to make a cash deposit into an escrow account and this money will be used to offset the monthly mortgage payment.
Thus, temporarily reducing the borrower’s payment requirements until the money runs out in the escrow account.
The main reason why home buyers go to such great lengths to secure these types of arrangements with lenders is for the simple reason of home loan qualification.
With a reduced monthly debt commitment, a borrower will be able to be approved for a higher loan amount.
This don’t just make a house affordable to the buyer, but also potentially helps him avoid private mortgage insurance.
Desperate home sellers are often observed to help buyers fund these escrow accounts with the purpose of helping buyers obtain the financing they need to buy the house.
Temporary buydown programs are often described as a line up of numbers.
- 2-1
- 1-0
- 3-2-1
- etc
These basically refer to the amount of interest that will be discounted from the actual loan rate in the initial years of the loan.
For example, 2-1 would mean that the loan interest will be reduced by 2% and 1% in the first and second year respectively.
If the main goal of a borrower to arrange a buy down is to qualify for a larger loan, then programs with the biggest interest drop in the first year will enable the borrower to obtain the highest loan.
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