2 Dangers of a Buydown Mortgage

A buy down mortgage option allows a borrower or seller to pay a lump sum in order to reduce interest rates for a short period of time. By paying the interest up front at a lower rate, the borrower or seller actually reduces monthly payments for 1 to 3 years. Sellers may offer this as an alternative to a reduction in the price of the home. This is a good option for most borrowers, but it does present unique risks.

#1 Terms and Conditions

Many buy downs come with additional terms and conditions that a standard mortgage loan will not put in place. The borrower may find a shorter grace period to make loan payments. For example, a payment is not typically late unless it is not received within 10 days of the bill. This may be shortened if the mortgage is bought down.

#2 Unable to Afford After Adjustment Price

Short sighted borrowers may focus on the payments required during the initial buy down period instead of thinking long term. If the borrower does not receive the raise, promotion or other increase in cash he or she was expecting, then the mortgage can become unaffordable after the rates adjust to the higher amount.

What is a 2-1 buydown mortgage?

In a 2-1 buy down mortgage, the borrower has the opportunity to pay points on a mortgage for two years. By paying points, the borrower can pay interest rates up front. In exchange, the borrower lowers his or her monthly payments for the first few years a mortgage is in place. Not only are monthly costs lower with a buy down, but the mortgage company may even offer an overall discount for making the payment up front. If you have the funds to consider a 2-1 mortgage buy down, you can stand to save a substantial amount of money on your loan in the long term.