You may not have heard of this type of mortgage but it has been around for years, and is approved by Fannie Mae and Freddie Mac. If you like the idea of a lower payment to start, but are nervous about taking an Adjustable Rate Mortgage (ARM) with it’s potential for negative amortization (owing more than your original loan amount), high interest rate caps, or slower reduction in principal, this may be the loan for you.

A Temporary Buy-Down mortgage allows you to qualify at a lower rate for a larger loan amount than that of the 30-year fixed without the drawbacks of a ARM or interest-only loan. It offers the best of both worlds: qualifying at the low start rate of an ARM along with the security of a long-term fixed rate.

Also, unlike a traditional ARM product, the interest rate will only increase by 1% a year instead of 2% a year.

The most common buy-down is called a 3-2-1 buydown. This means in the first year of the loan, the interest rate is 3% lower than the Note rate. The second year, the interest rate is 2% lower than the Note rate. In the third year of the loan, the rate is 1% lower. After the third year, the loan will become fixed at the Note rate for the remainder of the loan term. The interest rate of the loan will be the rate the buy-down was based on when the loan was originated.

EXAMPLE

The base fixed rate being used is 6.5%. The buy-down would be structured like this for a 3-2-1 buydown:
Year 1 – 3.5% interest rate
Year 2 – 4.5% interest rate
Year 3 – 5.5% interest rate
Years 4-30 – 6.5% interest rate

The borrower, seller, lender or a combination of any of these can subsidize a temporary buy-down. Lender-subsidized buy-down means the borrower does not have to pay a fee to lower the rate for the first 3 years of the loan. Lenders recoup their costs by charging slightly higher interest rates to offset the subsidy. Or the seller or borrower may pay an upfront fee.

Discuss with your Loan Officer or Mortgage Broker whether or not this is a good option for your unique circumstances.

©2005, Jeannine Doyle, D&S Publications. All rights reserved. Jeannine Doyle has turned her 25+ years experience into manuals and CDs that explain the complexities of lending in plain language for loan officers, real estate agents, students, and those considering a career in lending. This article is an excerpt from Managing the Mortgage Maze. For more about this comprehensive guide, visit www.MortgageMaze.com. Jeannine is a member of the National Advisory Council for GoGetLoan.com. Visit Jeannine’s page here: www.GoGetLoan.com/get/doyle.