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Buying Down Your Mortgage

Posted by  on Apr 16, 2009
 
Coming up with the initial down payment on a home can be really difficult. If you are considering buying a home or condominium, you need to figure out exactly what it is going to cost you. Most people do not account for the fact that they will need to make mortgage payments almost immediately after buying their home. Combine this with the costs of high property taxes in most states and you can become short on money quicker than you think.

A good technique to give yourself a little extra cushion at the beginning of your mortgage is to buy down the interest rate on your home loan. Basically, you pay extra cash up front in the form of points on your home loan. Your home loan lender will then reduce the interest rate for a particular amount of time on your home loan payments. This approach to your home loan gives you some extra time to rebuild your cash reserve by making lower monthly home loan payments in the mean time. It won’t save you money overall, but it does buy you some extra time, especially when things might be tight or if property taxes are due within a few months of the purchase of your home.

The usual home loan buy down situation comes in the form of a three year agreement. By paying home loan points up front, you can lower the interest rate on your mortgage for the first three years. For the first year, you could get relief of 2 percent of the home loan, so you would pay at an interest rate of 5 percent instead of 7. The second year of the home loan would then see a slight interest rate increase as well as the third year. After the third year, you are back to paying the normal interest rate on your home loan. By that time, you should have rebuilt your savings and be in a better position to comfortably make your monthly mortgage payments while still having something set aside for those little emergencies that always occur in life.

The one downside of buying down the interest rate on your home loan is that you need to come up with extra cash at the time of purchase. Many people are surprised to find that they can find the extra money when they really need it.

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