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.