Question:

What are the most common types of temporary subsidy buy downs?

Answer:

Though mortgage lenders offer different types of temporary mortgage subsidy buy downs, there are three types of them that are very popular. These are:

  • 3-2-1 Temporary subsidy buy down
  • 2-1 Temporary subsidy buy down
  • 1-0 Temporary subsidy buy down

3-2-1 Temporary Subsidy Buy Down

In a 3-2-1 subsidy buy down, the monthly payment in years one, two and three is calculated at rates 3%, 2% and 1%, respectively, lesser than the interest rate of the loan.

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.

2-1 Temporary Subsidy Buy Down

A 2-1 subsidy buy down is exactly the same as a 3-2-1 buy down except for the fact that the subsidy lasts for only two years instead of three. The monthly payment in years one and two and three is calculated at rates 2% and 1%, respectively, lesser than the interest rate of the loan.

1-0 Temporary Subsidy Buy Down

By now you would have understood that a 1-0 subsidy buy down lasts for just one year. The monthly payment in the only subsidy year is calculated at 1% lesser than the interest rate of the loan.

Example of Temporary Subsidy Buy Downs

Consider a loan of $100,000 at 7% interest rate, to be paid over 20 years. If the subsidy follows the 3-2-1 model, in the 1st year the monthly payment will be calculated at 4%, in the 2nd yr it will be calculated at 5 % and in the 3rd year at 6%. A table with values calculated for the example is given below:

Year Monthly payment required Monthly payment made Difference per month Difference per year
1 $775.30 $605.98 $169.32 $2,031.83
2 $775.30 $659.96 $115.34 $1,384.07
3 $775.30 $716.43 $58.87 $706.43

*If the subsidy follows the 2-1 model, only year 2 and year 3 will form the table. If the subsidy follows the 1-0 model, only year 3 will form the table

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