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Simple English definitions for legal terms
Mortgage Rate Buydown
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A quick definition of Mortgage Rate Buydown:
A mortgage rate buydown is when a buyer pays extra money to the lender in exchange for a lower interest rate for the first few years of their mortgage. This means that their monthly payments will be lower at the beginning of the loan. For example, if the mortgage is at a 7% interest rate for 30 years, the buyer might pay extra to have a 4% interest rate for the first year, 5% for the second year, and 6% for the third year. After that, the interest rate goes back up to 7%.
A more thorough explanation:
A mortgage rate buydown is a way to lower the interest rate on a mortgage for the first few years. The buyer pays the lender money to get a reduced interest rate. There are different ways to structure a mortgage rate buydown, but one example is a 3-2-1 buydown.
Here's how a 3-2-1 buydown works:
- In year one, the buyer pays a reduced interest rate of 4%.
- In year two, the buyer pays a reduced interest rate of 5%.
- In year three, the buyer pays a reduced interest rate of 6%.
- After year three, the interest rate goes back up to the original rate (in this example, 7%) for the rest of the mortgage.
So if someone had a 30-year mortgage with a 7% interest rate, they could pay extra money upfront to get a 3-2-1 buydown. This would lower their interest rate for the first three years, making their monthly payments lower during that time.
Another example of a mortgage rate buydown is a 2-1 buydown, where the buyer pays a reduced interest rate for the first two years before the rate goes back up to the original rate.
Mortgage rate buydowns can be a good option for people who want lower monthly payments in the first few years of their mortgage. However, it's important to consider the upfront cost of the buydown and whether it's worth it in the long run.