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Buying down a mortgage involves someone paying the lender an amount of money in exchange for a reduced interest rate during the first years of a mortgage, often anadjustable-rate mortgage (ARM). Buydowns can occur in other types of mortgages as well, however. They're not limited to ARMs.1

 

Mortgage buydowns always include principal and interest in the consumers' monthly payments, so their loan balances grow smaller every time they make mortgage payments. A smaller mortgage balance means that equity is growing, even when appreciation is low.

 

Common Mortgage Buydown Features

Payments are reduced under a mortgage buydown because they're calculated on a lower interest rate over a specific term. The difference between the "real" note rate and the lowered interest rate is paid in cash in advance.

 

Think of it as a subsidy. It's like socking away $1,200 in the bank and withdrawing $100 every month for 12 months to help make your mortgage payment.

There's typically a fee involved, but it can be included in the loan amount when the buyer exercises this option.2

The 3-2-1 Mortgage Buydown

One type of buydown is the 3-2-1 buydown:

• It's a 30-year fully amortized mortgage
• The interest rate increases 1% every year for the first three years
• The interest rate is fixed for the remaining termvv

  Buying down a mortgage involves someone paying the lender an amount of money in exchange for a reduced interest rate during the first years of a mortgage, often anadjustable-rate mortgage (ARM). Buydowns can occur in other types of mortgages as well, however. They're not limited to ARMs.1

   

  Mortgage buydowns always include principal and interest in the consumers' monthly payments, so their loan balances grow smaller every time they make mortgage payments. A smaller mortgage balance means that equity is growing, even when appreciation is low.

   

   

   

•  

  Mortgage buydowns always include principal and interest in the consumers' monthly payments, so their loan balances grow smaller every time they make mortgage payments. A smaller mortgage balance means that equity is growing, even when appreciation is low.

   

  Common Mortgage Buydown Features

  Payments are reduced under a mortgage buydown because they're calculated on a lower interest rate over a specific term. The difference between the "real" note rate and the lowered interest rate is paid in cash in advance.

   

   

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