Mortgage Buydowns

When it comes to financing a home, there are several options available to borrowers. Two of these options are mortgage buydowns and mortgage assumptions. Both can be useful tools for borrowers considering today,s volatile rates, but they work in very different ways.

Mortgage Buydowns

A mortgage buydown is a financing technique where the borrower pays an additional fee upfront, called points, to reduce the interest rate on their mortgage loan. This can help to lower the monthly mortgage payments during the early years of the loan. The buydown can be paid by the borrower, the seller, or a combination of both.

The borrower can choose between two types of mortgage buydowns: temporary or permanent. A temporary buydown reduces the interest rate for a set period, usually one, two, or three years, before returning to the original rate. A permanent buydown, on the other hand, reduces the interest rate for the entire life of the loan.

Mortgage buydowns can be a good option for borrowers who have limited funds in the early years of homeownership and want to lower their monthly mortgage payments. However, it's important to consider the overall cost of the buydown, including the additional points and interest charges over the life of the loan.

Mortgage Assumptions

A mortgage assumption is a financing technique where the buyer of a home takes over the existing mortgage of the seller. This can be beneficial for the buyer if the interest rate on the existing mortgage is lower than the prevailing market rate. The buyer takes on the remaining term of the mortgage and makes payments to the lender as if they had originated the loan themselves.

Mortgage assumptions can be particularly useful in a rising interest rate environment, as they allow the buyer to avoid the higher interest rates that may be available at the time of purchase. They can also be helpful in situations where a seller has a low-interest rate on their mortgage and wants to transfer that benefit to the buyer.

It's important to note that mortgage assumptions are not available for all types of mortgages. For example, FHA and VA loans are typically assumable, while conventional loans may not be.