Question:

What is temporary mortgage buy down and how does it work?

Answer:

A temporary mortgage buy down is a mortgage option where the borrower is allowed to make lesser payments in the early period of the loan and then with the passage of time the payments increase to compensate the lender for the initial period. Usually the lesser payment period runs for 3 or less than 3 years.

To understand the working of a temporary buy down, let's consider a "3-2-1 mortgage buy down". This is a very common and popular type of temporary buy downs.

3-2-1 Temporary Mortgage Buy Down

A 3-2-1 mortgage buy down, is named after the way it works. What happens is that the monthly payment in the first year is calculated at a rate 3% less than the interest rate; in the second year it is calculated at 2% less and in the third year at 1% less than the interest rate of the loan.

After the three initial years of lesser payments the payment rate is made equal to the interest rate and the amount not paid in the early years is added to the original loan balance.

Let's look through an example of a loan of $200,000 at 6% interest rate, which has to be paid over 30 years. In the first year the monthly payment will be calculated at 3%, in the second year it will be calculated at 4 % and in the third year at 5%.

Year Monthly payment required Monthly payment made Difference per month Difference per year
1 $1,199.10 $843.21 $355.89 $4,270.72
2 $1,199.10 $954.83 $244.27 $2,931.25
3 $1,199.10 $1,073.64 $125.46 $1,505.49

The difference of payments in first three years can either be added to the loan balance to be paid over the remaining life time of the loan, or paid at the beginning/end as a balloon payment.

Advantages of Temporary Mortgage Buy Downs

The main advantage of temporary buy downs is that they allow borrowers with low incomes to qualify for loans that they wouldn't otherwise qualify for. Suppose, a borrower has some excess cash due to a sale of an asset but has low income. This might not qualify him him/her for a prime loan but the upfront cash and probability of income increase makes him/her a good candidate for a temporary buy down mortgage.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 2.9/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: