Monday, November 10, 2008

Interest Rate Buydowns

Today's tip comes to us courtesy of Tony Kerstiens at Metro Brokers dotcom RealEstate -- 303-880-3579, tony@dotcomrealestate.org

An interest rate buydown is something that first time home buyers should consider if they are concerned that there's not much difference between their current rent payment and the amount of a mortgage payment.

A buydown is a temporary reduction in the interest rate of a fixed-rate mortgage. A 2-1 buydown has a reduction of 2% the first year, a reduction of 1% the second year, and then the regular note rate for the rest of the loan term. As an example, a 2-1 buydown for a 30-year fixed rate mortgage with a note rate of 6% would have a payment based on 4% for the first year, 5% for the second year, and 6% for the remaining 28 years.

Buydowns are not free, but if the seller is willing to pay the full 6% in buyer closing costs they are allowed to pay with FHA loans, the money in excess of the usual closing costs can be used to pay for the buydown. Buydowns make it easier for buyers to buy houses, and they make it easier for sellers to sell houses.

Buydowns are not restricted to first time home buyers.

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