What You Should Know About Buydown Mortgages!

What You Should Know About Buydown Mortgages!
05/26/2022

What You Should Know About Buydown Mortgages!

When you’re ready to buy your first home, you might think about getting a mortgage with a “buy-down” clause. The idea of the buy-down mortgage is that it reduces the upfront cost of buying a home by offering the opportunity to pay less now and more later. Sounds like an awesome deal, right? It can be! But before you dive into this kind of mortgage, keep reading for more information on what it is and how it works. You may have heard about a “buy-down mortgage” and not known what it was. Maybe you were curious about why this type of financing is sometimes called “upside down” financing, too. All good questions! Let’s learn more!

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What You Should Know About Buydown Mortgages!

What is a Buy-Down Mortgage?

A buy-down mortgage is a special type of financing that allows you to pay less for your home upfront. You’ll make extra payments to the lender throughout the life of the loan to make up for the lower initial payment. To understand how a buy-down mortgage works, you have to first understand the “front-end” and “back-end” of a mortgage. A mortgage is the amount of money you borrow from the lender to buy the property. The front-end is the amount you pay when you close on the home. The back-end is the total amount you have to pay back at the end of the loan’s term, plus any interest. When you get a buy-down mortgage, you’ll have a smaller front-end payment. You’ll pay more on the back-end, though, to make up for the lower initial payment.

How Does a Buy-Down Mortgage Work?

On a buy-down mortgage, you’ll make a lower initial payment. The lender will give you a higher rate on the loan in exchange for that reduced payment. If you’re getting a fixed-rate mortgage, the rate will usually be higher too. This encourages you to pay off more of the loan in the early years of the mortgage. And that extra payment will go toward paying off the extra interest you’ll pay on the buy-down loan. That’s why it’s called “upside down” financing. You’re making payments on the back-end of the mortgage that go toward paying off the extra interest you paid on the front-end.

Who Should Get a Buy-Down Mortgage?

You might consider a buy-down mortgage if you’re buying a home that’s more expensive than your current budget allows. Or if you need a larger down payment than you’d like to make. A buy-down mortgage can help you buy a home you might not have been able to afford without it. You may also want to consider a buy-down mortgage if you don’t know how long you’ll stay in the property. If you move within a few years, you’ll end up paying more than you would have in a lower-cost loan.

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What You Should Know About Buydown Mortgages!

What to Watch Out for With a Buy-Down Mortgage?

To make up for the lower initial payment, you’ll pay more on the back-end of a buy-down mortgage. That means you’ll pay more in interest over the life of the loan. And that means you’ll pay more in total over the length of the mortgage than you would have with a lower-cost loan. A buy-down mortgage is a good option if you’re in a financial situation that requires a larger down payment. But if you have the money for a standard down payment, a lower-cost loan might be a better option. You’ll end up paying less in interest over the life of the loan.

Is A Buy-Down Mortgage Right For You?

If you need a larger down payment to buy a home, a buy-down mortgage can help. You can put the difference between your down payment and the minimum down payment into a savings account. Then, when you’re ready to buy a house, you can put that saved money toward the down payment. It’s important to understand that a buy-down mortgage is a commitment. You’ll have to make those higher payments on the back-end of the loan no matter what happens. If you can’t make those payments, you might lose your house. So make sure you understand how a buy-down works before you get one.

Conclusion

A buy-down mortgage is a special type of financing where you make a lower initial payment. You’ll make extra payments to the lender throughout the life of the loan to make up for the extra interest you paid on the front-end. You may consider a buy-down mortgage if you’re buying a home that’s more expensive than your current budget allows. Or if you need a larger down payment than you’d like to make. With a buy-down mortgage, you may end up paying more over the life of the loan. That’s because you’ll pay more in interest over the life of the loan. But if you have the money for a standard down payment, a lower-cost loan might be a better option. You’ll end up paying less in interest over the life of the loan.

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