What is an interest-rate buy down?
• Quick definition: Buy downs are a financing technique that is used to reduce monthly payments during the first few years of the loan.
• An Interest rate buy down is a tool that helps buyers qualify for larger loan amounts so they can purchase a higher-priced home than they normally could.
• A buy down allows consumers to pay points up front in return for a lower interest rate for the first few years. These extra points are tax deductible.
• In many cases, buyers may relocate for employment reasons, and need a buy down because employers will pay the extra points for them as part of the relocation package.
How does the buy-down work, and what are the different types?
• The most common buy down is the 2-1 buy down, which typically costs 3 points above the current points. For the first year of the loan, the rate is reduced by 2 percent, and 1 percent the second year.
• Another option is the 3-2-1 buy down. This reduces the rate by 3 percent the first year, 2 percent the second and 1 percent the third year. After that you pay the full rate.
• Some programs are called “flex-fixed” buy downs. These buy downs increase interest in six-month intervals instead of annually. For example, a flex-fixed buy down may cost 1.5 points. The first six months, your rate would be 7.5 percent. The next six months would be 8 percent, the next 8.5, then 9 percent.
For more information on buy down loans or other loans, please contact me. I will work out the best possible solution for you.