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Buydown Mortgage

Posted by  on Apr 16, 2009
 
In mortgage, there are several different types of loans, one being the buydown loan. A temporary buydown is the type of loan that has an initially discounted interest rate that increases to an agreed-upon fixed rate usually within one to three years. An initially discounted rate allows you to qualify for more houses with the same income and gives you the advantage of lower initial monthly payments for the first years of the loan when extra money is needed for furnishings or home improvements. In order to reduce your monthly payments during the first few years of a mortgage you make an initial lump sum payment to the lender.

Some people might not have enough money to pay for the buydown. If this is the case, the lender can pay this fee if they agree on a little higher interest rate. If the interest rate on the note is eight percent with a 2-1 buydown mortgage your initial discounted rate is 6% and you would have 6% interest rate for the first year, seven percent for the second year, and 8% afterwards. You will need to prepay the difference in payments between the 6% and 8% rates the first year, and between the seven and eight percent rates the second year.

It is helpful to know that the lower rate may apply for the full duration of the loan or for just the first few years. A buydown can be used to qualify a borrower who would otherwise not qualify. This is because a buydown results in lower payments, which are easier to qualify for. Graduated payment mortgages have payments that start low and gradually increase at predetermined times. Lower initial payments allow you to qualify for a larger loan amount. The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, your loan will be negatively amortizing during the early years of the loan, then pay off the principal at an accelerated pace through the later years.

Different lenders offer different GPM payment plans, which may vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years. The right type of mortgage chiefly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford. If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years.

A Balloon Mortgage offers lower interest rates for shorter-term financing, usually five or seven years. Because of a lower interest rate, it is easy to qualify for these types of mortgages. However, it is not a good idea to accept an ARM unless you can afford the maximum monthly payment.

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