Primary Categories of Buydown Mortgages

House key on a wooden table

House key on a wooden tableMost people fear the long-term financial responsibility of a mortgage. There are however various options which enable you to afford the home of your dreams without a substantial financial burden. A buydown mortgage, for instance, requires a large upfront payment and small monthly repayments.

The upfront payment is made as a purchase of discount points which reduce your loan’s rate at a specified percentage. This process is what you call buying down a mortgage hence the loan’s name.

Here are the various categories of buydown home loans, as explained by Primary Residential Mortgage, Inc., mortgage experts from Lake Oswego.

2-1 Buydowns

These are mortgages in which your interest rate changes during the first two years of your loan. You pay 2% lower rates in the initial year and 1% lower in the second year compared with the rate your lender gives for your entire mortgage term.

After these two years, the interest rate reverts to the original one for the remaining term.

3-2-1 Buydown

This mortgage increases your rate over a three-year period by 1% P.A. You pay 3% in your loan’s initial year, 2% in the subsequent then 1% in its third year lower than the set interest rate of your loan. The 3-2-1 mortgage nevertheless requires higher amounts of down payment than 2-1 home loans.

Permanent Buydown

In this option, you can buy discount points to reduce your loan’s interest rate over its lifetime. You will need a substantial down payment amount to buy these points at your loan’s closing.

One discount point in a permanent buydown is equivalent to 1% of interest. The cost of a discount point, however, varies among lenders.

If you are expecting some money in future maybe from a promotion, inheritance or after you finish paying off another loan, temporary buydown mortgages are your ideal choice.

These include the 2-1 and 3-2-1 home loans. If you are living in your house for an extended period, then a permanent buydown is the best choice.