The Disadvantages of a Temporary Mortgage Buydown

A temporary mortgage buy down allows you to provide cash up front to pay off the interest on your loan for a short period of time. As such, the interest assessed each month will be much lower, and your monthly payments will be lower. In most cases, you will also net savings in the long run over paying the mortgage at a quoted rate in its entirety. The buyer or seller may provide the funds for a buy down and depending on who is doing this; the potential disadvantages will be different.

Disadvantages of a Seller Buy down

A seller may offer to buy down your mortgage in order to make it more affordable for you, increasing your ability to purchase the property. This typically occurs when you are purchasing direct from the builder or manufacturer. In many ways, this option actually makes your home more affordable than if the seller lowered the selling price. You will have a lower monthly payment at the beginning of the loan when you will have the highest amount of other expenses and lowest ability to pay. Most borrowers are actually affected more by the monthly payment than the total purchase price.

However, over time, it is the purchase price of the home that determines the size of your mortgage. The size of your mortgage determines how much you will spend in financing. When a seller offers a buy down in lieu of reducing the price of the home, you will typically net a higher expense in the long run than if you took the reduced home price. You may also have to forgo other demands in your contract in order to get the seller to agree to the buy down.

Disadvantages of a Buyer Buy down

You can personally buy down your mortgage. This is typically done when the buyer has extra cash on hand. Since the interest rate on the loan is likely to be high owing to the borrower's bad credit, the cash is better used if applied to the buy down then held for the monthly payments. Buying down the first 3 years of a mortgage makes monthly payments in those years less expensive. It also may net you savings over time since the lender will actually cut you a deal when it comes to the buy down.

However, this is only an option if you truly have a plethora of cash on hand. Most borrowers will have to spend the majority of their liquid assets just to place a down payment on the home and cover closing costs. Only the highest income borrowers will typically be able to afford a buy down, and these borrowers are the ones who need it the least. Further, you will likely find your lender will require additional items from you in order to accept your buy down offer. Such requirements may include very high fees if you modify the loan in the future once the buy down has expired. You may also find limits on home equity loans you are eligible for during the first 3 to 5 years.