Handling a Mortgage Buy Down

A mortgage buy down may be the better option compared to an adjustable rate mortgage.

With a mortgage buy down, you basically have the same scheme as a fixed rate mortgage which has a 1% increase in interest rate for the first three years and the fixed rate for the remaining term.

In a mortgage buy down, however, you manage to retain the original interest rate for the whole term, provided that you pay for the interest rates of the next three years in advance. Let’s say your interest rate for the first year is 3.75%, and in increases to 4.75% in the second year, 5.75% in the third year, and 6.75% in the fourth through 30th year. This means that you will have to pay a high 6.75% interest rate for 27 years.

That translates to a ridiculously huge sum of money if you put it together. This is what happens when your fixed rate mortgage is not bought down. When you buy down your mortgage, on the other hand, you only pay for the interest rate increase of the first three years. The interest rates of the remaining term will drop back to 3.75% on your 4th through 30th year when you choose the buy down option. In money talk, this means paying $15,853 to lower your 27-year interest rate to 3.75%. This might look like a heft sum at first, but it is well worth it. It beats the fluctuating interest rates of an ARM and the ridiculously high 6.75% interest rate of a fixed rate mortgage that hasn’t been bought down.

Fixed Rate Mortgages Simplified

A fixes rate mortgage is the oldest and most popular mortgage scheme in the market today. A lot of people choose the fixed rate mortgage over the adjustable rate scheme for a number of reasons. Just like the ARM or adjustable rate mortgage, a fixed rate mortgage has its own set of advantages and disadvantages.

Pros

On the upside, a fixed rate mortgage gives the borrower more security in terms of fixed payments through the years. There’s a great probability that interest rates will skyrocket instead of drop as the mortgage matures. With a fixed rate mortgage, you won’t have to worry about paying for more than what you bargained for.

In other words, even if the mortgage interest rate rises from 10% to 15% in five years, you’ll be paying a significantly lower monthly payment compared to borrowers who took their mortgages later than you did.

Cons

On the down side, if the market psychology shifts, and real estate interest rates drop, you will be paying higher monthly fees compared to the accepted mortgage interest rates of the time.

You can probably dodge this consequence by choosing to refinance. However, refinancing also costs you money. You will be paying a hefty some just be altering the terms of your loan. An average of 1 to 3 years as a break even period is already a kind estimate.

Some people who are too hasty in their decisions actually suffer from bigger losses because of refinancing. They end up having to wait for at least five years to break even from the costs of bad refinancing.