Mortgage Buydown Agreement

Buydowns are easy to understand if you think of them as a mortgage subsidy granted by the seller on behalf of the home buyer. Typically, the seller registers funds into a trust account that subsidizes the loan in the first few years, resulting in a decrease in the monthly payment for the mortgage. This lower payment makes it easier for the home buyer to qualify for the mortgage. Owners or sellers can offer a buy-back option to increase the chances of selling the property by making it more affordable. In a 3-2-1 buydown, the buyer will pay for the first three years lower payments for the loan. These payments are offset by the seller`s buydown contribution. For example, a home buyer who received a flat rate of 6.75% for a $150,000 loan for 30 years would have lower payments for the first three years. In the first year, they paid 3.75% interest, 4.75% in the second year and 5.75% in the third year. In the years following the first three years, their payments would rise to the standard rate of 6.75%, or 973 $US per month. While in the first three years they benefited from saving the lower interest rate, the difference in payments would have been paid by the seller to the lender as a subsidy. A buydown is a mortgage financing technique by which the buyer tries to get a lower interest rate at least for the first few years of the mortgage or perhaps for the entire life.

The owner or seller of the property usually makes payments to the mortgage institution, which in turn reduces the buyer`s monthly interest rate and therefore the monthly payment. However, the home seller usually increases the purchase price of the home to offset the cost of the buyback contract. A 2-1 buydown is structured in the same way, but its discount is only available for the first two years. If a borrower got a US$100,000 loan for 30 years at a fixed rate of 6.75%, they were able to reduce their payments in the first two years with a 2-1 buydown. With a 2-1 buydown, they could pay 4.75% interest in the first year and 5.75% interest in the second year. In the following years, their payments would increase at the standard rate of 6.75% and they would pay 649 $US per month. The savings they made in the first two years would have been offset by subsidies paid by the seller to the lender who granted them the two-year discount. Redemption terms can be structured in different ways for mortgages. Most buydowns last a few years, and then mortgage payments move to a standard rate as soon as the buydown expires.

3-2-1 and 2-1 mortgage purchases are two common structures. In accordance with the terms of each repurchase agreement, all amounts distributed to the buyer in accordance with the above sentence are applied in order to reduce the principal balance of the corresponding buydown mortgage. The mortgage and mortgage rating reflects the ongoing payment terms and not the payment terms of the repurchase agreement….

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