Interest Rate Buydown Definition
Interest
rate buydowns are used to help you qualify
for a larger loan and obtain a higher priced
home. Buydowns allow you to pay extra points
up-front in return for a lower interest
rate for the first few years.
Since the
additional points
you pay are tax deductible, there
are some tax benefits. People relocating
due to employment often obtain buydowns.
Employers sometimes pay the extra
points as part of a relocation package.
The
most common buydown program is the 2-1
buydown. With this program the interest
rate is reduced 2 percent during
the first year and 1 percent the second
year. For example, if you obtain a 2-1 buydown
on a 30-year, fixed, 8 percent mortgage,
the rate is 6 percent the first year, 7
percent the second year and 8 percent
thereafter.
Some
companies offer a 3-2-1 buydown. This reduces
your rate 3 percent
the first year, 2 percent the second
year and 1 percent the third year.
There are many variations
of buydown programs. Some buydown programs
result in interest rates changing every six
months as opposed to every year.
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Mortgage Programs
