The Disadvantages of a Mortgage Buy Down

A mortgage buy down essentially allows you to pay a large lump sum in exchange for a lower interest rate for a short period of time. The options are typically provided for about 3 years of a 30 year mortgage, meaning you will only have the lower interest rate for a very small amount of time. However, you will save money in that period, and the savings can amount to a few thousand dollars over a few years. You will also have lower mortgage payments, allowing you to better budget your costs. Most people choose a buy down in the beginning of their mortgage to lower payments in the hardest years. Despite all of these advantages, though, there are many disadvantages to buy downs.

Need the Lump Sum

The main reason many people will not choose this option is because they do not have the lump sum required for the initial buy down. On most $300,000 to $350,000 mortgages, you will need at least $15,000 to participate in a 3-year buy down. Typically, you will be seeking the buy down at the beginning of your mortgage. If you put 15% down on a home costing $400,000, this means you would need about $65,000 cash to make your down payment and then buy down a portion of your mortgage. You will also likely be facing closing costs around $3,000 to $5,000. Most people simply do not have the cash on hand to make this type of financial commitment.

Adjustable Interest Rates are Uncertain

The basis for a mortgage buy down is an adjustable rate. You will receive a lower rate at the beginning of the buy down period than you will face at the end. Adjustable rates are not altogether bad; in some cases, they grow appropriately with your income and help you afford a more expensive home. However, if not managed properly, adjustable rate mortgages can be very detrimental. If you are planning on reducing a 7% interest rate to, for example, 3% for one year, 4.5% for a second year, and 6% for a third year, you will need to be able to make the higher payments once the third year comes along. People who elect adjustable rates always have good plans to make more money and afford the higher payment. Plans do not always come through completely; for example, if you lose your job, will you be able to keep up with the payments at the higher interest rate?

Not All Lenders Offer the Option

Only some lenders will be willing to make this deal with you. Further, making this type of arrangement will disqualify you from any benefits you may seek through an FHA mortgage guaranty. The adjustable rates, especially when the initial rate comes in below the national prime interest rate, are considered high-risk lending to most financial authorities. Engaging in this high risk will require you to meet with a very specific set of lenders, and they may not be the best lenders on the market.