Interest Rate Buy
Down
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consultation with our home loan experts.
The most
common buy down is the 2-1 buy down. In the past, for a buyer to secure
a 2-1 buy down they would pay 3 points above current market points in
order to pay a below market interest rate during the first two years of
the loan. At the end of the two years they would then pay the old market
rate for the remaining term.
As an example, if the current market rate for a conforming fixed rate
loan is 8.5% at a cost of 1.5 points, the buy down gives the borrower a
first year rate of 6.50%, a second year rate of 7.50% and a third
through 30th year rate of 8.50% and the cost would be 4.5 points. Buy
downs were usually paid for by a transferring company because of the high
points associated with them.
In today's market, mortgage companies have designed variations of the
old buy downs rather than charge higher points to the buyer. In the
beginning they increase the note rate to cover their yields in the later
years.
As an example, if the current rate for a conforming fixed rate loan is
8.50% at a cost of 1.5 points, the buy down would give the buyer a first
year rate of 7.25%, a second year rate of 8.25% and a third through 30th
year rate of 9.25% , or a three-quarter point higher note rate than the
current market and the cost would remain at 1.5 points.
Another common buy down is the 3-2-1 buy down which works much in the
same ways as the 2-1 buy down, with the exception of the starting
interest rate being 3% below the note rate. Another variation is the
flex-fixed buy down program which increases at six month intervals rather
than annual intervals.
As an example, for a flex-fixed jumbo buy down at a cost of 1.5 points,
the first six months rate would be 7.50%, the second six months rate
would be 8.00%, the next six months rate would be 8.50%, the next six
months rate would be 9.00%, the next six months the rate would be 9.50%
and at the 37th month the rate would reach the note rate of 9.875% and
would remain there for the remainder of the term. A comparable jumbo 30
year fixed at 1.5 points would be 8.875%.
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phases of a real estate loan transaction. We also provide helpful
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