Short on Cash? Get a Mortgage with a Buy Down

by Syd Johnson

A buy down is an alternative financing technique where you make
significantly lower payments for the first few years of the
loan, and make up the difference with larger payments in the
later years of the loan. The initial payments might be interest
only or less than interest payments, so you can expect to pay a
much larger monthly fee when you actually start working on the
principal.

Loan structure If you get a temporary buy down, the seller might
provide the loan with a very low interest rate and no up front
fees or points. This will make your loan package extremely
cheap. Your monthly payment will be significantly smaller than
the actual amount required to pay off the monthly interest and
decrease the loan principal.

Then according to the contract the interest rate is increase by
a small percentage each year, until your payments level off and
cover both monthly interest payments and a reduction in the
principal.

By the time the loan is actually paid off, you will have a very
large monthly bill because all of the fees and points that you
didn’t pay up front were rolled over into the loan. You didn’t
skip anything you just decided to pay it all later.

Who gets buy downs? Buys downs are perfect for the upwardly
mobile. That is singles or couples who are purchasing their
first home, but expect a rapid or substantial increase in their
income within a couple of years.

Unlike a fixed rate mortgage your payments will be steadily
increasing over the years. In addition, unlike an adjustable
rate mortgage, you will find yourself paying way over market
rate for the last few years of the loan.

These types of loans are usually setup as 15-year of 30-year
deals. The big advantage of course is that you can get a lot of
house for very little money up front. However, the seller or
lender will reap a much higher rate of return on your loan than
he or she should get on a fixed rate or regular adjustable rate
mortgage.

It’s a great deal in the beginning, but make sure you will have
the income later on to cover the large payments plus your other
household expenses.

About the author:
Syd Johnson, Editor
http://www.rapidlingo.com