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Interest Rate Buy-Downs
If the current market rate for a fixed-rate loan is 8.5% with 1.5 points, the buy-down would give the borrower a first-year rate of 6.5%, a second-year rate of 7.5% and a third through 30th year rate of the original 8.5%. The cost for the buy-down would be 4.5 points.
There are now many new variations on the buy-down. You don't simply have to pay higher rates in the beginning.
For example, you could take a buy-down that increases the note rate throughout the years. If the current rate for a fixed-rate loan is 8.5% with 1.5 points, the buy-down could give the buyer a first-year rate of 7.25%, a second-year rate of 8.25% and a third through 30th year rate of 9.25% -- three quarter points higher than the current market rate. The initial cost would remain at 1.5 points.
This helps the buyer in the initial up-front costs of the loan.
Another popular buy-down option is the 3-2-1 buy-down. This method works in the same way as the 2-1 buy-down, except the starting interest rate is 3% below the current market rate. Other programs offer fixed buy-downs that increase at six-month intervals, not annually.
For instance, a flex-fixed jumbo buy-down with a cost of 1.5
points may have a first six-month rate of 7.5%, the next six months would
have a rate of 8.00%, the next would be 8.5%, the next would be 9.00% and
so on. In the 37th month of the loan, the rate would reach 9.875% and
remain there throughout the rest of the loan term. In comparison, a
30-year fixed rate mortgage with 1.5 points would have a fixed-rate of
8.875%.