The Benefits of a Mortgage Buy Down

A mortgage buy down may either be paid by the seller or by the borrower. The option is typically extended by the seller, however. When a builder or private seller does not want to reduce the price of a home, a buy-down option may make it more affordable for potential buyers even at the current ticket price. Basically, a seller offers to pay a lender to reduce the interest rate of the buyer.

How a Buy Down Works

When the mortgage buy down occurs, the bank agrees to drop an interest rate a certain number of points for a short period of time. The most common examples are a 2-1 mortgage and a 3-2-1 mortgage. In a 2-1 example, a borrower sees an interest rate 2% lower than his actual interest in the first year and 1% lower in the second year. In the third year, the interest rate is the same as he has negotiated with the bank. In a 3-2-1 option, a borrower sees an interest rate 3% lower than she has negotiated in the first year. It is 2% lower in the second year and 1% lower in the third year. By the fourth year, the borrower's interest rate will be the exact she negotiated with a lender. This makes monthly payments less expensive during the initial 2 or 3 year period.

Benefit to Seller

A seller may extend this option to encourage people to purchase their home. In actuality, most buyers are more concerned with their monthly payments than with the total cost of the home. Reducing a home's price by $20,000 will not make it that much affordable each month over a 30 year mortgage. However, offering to buy down the first $20,000 of a mortgage will actually save a buyer a few hundred dollars a month for the first few years of the mortgage. In this way, a buy down actually reaches a wider audience than a straight price reduction. Buyers are willing to consider homes they would not otherwise be able to afford for a few years.

Benefit to Buyer

The buyer benefits tremendously in this situation. For a buyer, interest rates and monthly payments are reduced during the most critical period. For example, if you are searching for a home, you may realize that you would like to live in the home for 5 years. However, the size and type of home you can afford on your current salary will not support you 5 years in the future. This is a common problem, and it is the main reason buyers seek adjustable interest rates. Adjustable interest rates are very uncertain, and they can lead many buyers into bankruptcy. If you are looking for a way to make a more expensive mortgage affordable in the beginning, asking for a buy down may be your best bet. When you negotiate your home contract, consider offering full price but asking for a buy down. You will be able to afford a much nicer, more expensive home this way than if you simply try to low-ball an offer.