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Introduction to Buy Down Purchase Plans

Buy down purchase plans or "buy downs" are monetary subsidies given to a home buyer to lower his effective interest rate, his monthly mortgage payments and help him quality for the loan. In times past the home- builder or seller of the property was generally the party who provided the funds necessary to provide the buy- down from sale proceeds. Today, other parties in addition to seller or builder are allowed to participate in buy - down plans, including relatives, employers, the buyers themselves, and in some instances investors.

Buy downs have been available for years but were generally permanent buy downs, that is, the buyers overall interest rate was reduced between 1/2% and 1% interest for the entire term of the loan. This permanent buy- down resulted in the buyer saving $25-50 per month for the entire 30-year term. However, it was very costly to the seller or builder and it only resulted in a small decrease in the buyer's monthly payments.

Temporary buy downs came into being in the late 1970's as interest rates climbed dramatically, putting the payments out of reach for many would be homeowners. The temporary buy down only reduces the buyers Interest rates and payment for a short period of time such as 1-5 years but It reduces the Initial payments much more dramatically for the home buyer. Instead of a $25-50 reduction for the entire mortgage term, the buyers payments could be reduced by as much as $200 per month in the first year, $100 per month during the second year and $50 per month during the third year. This much larger reduction of the buyer's payment puts more buyers in the position to be able to qualify for mortgage loans and make the required monthly payments. The temporary buy down is better suited to many home buyers today because they will probably only live in their homes an average of five years, nationwide. As the subsidies are withdrawn the payments will rise but
so will the average buyer's income.

Buy down purchase plans have many names such as discount point buy downs, proceed buy downs, pledged account buy downs, interest rate buy downs and many more. The important thing to remember is that all buy downs can be divided into two categories; permanent buy downs and temporary buy downs. Permanent buy downs will reduce the buyer?s payment a small amount for a long time. Temporary buy downs will reduce the buyer's payments a substantial amount for a short time. Which is best for your buyer will generally be determined by the length of time the buyer expects to live in the home and how much payment he can afford to make Once you have mastered this basic concept you will be ready to move on to an in depth study of the specific buy down plans available in your market area.

One of the most common forms of buy down in use today is the 3-2-1-interest rate buy down. This is a temporary buy down which would reduce the buyer's overall interest rate by 3% in year l, 2% in year 2 and 1% in year 3. This buy down can reduce the buyer's payments by up to $200 in the first year, $100 in the second year and $50 in the third year The $200 per month reduction in payments is equivalent to giving the buyer an $800 raise in income for loan qualification purposes. It will increase the effective income ratio from 28% to approximately 38% for the buyer. Probably more importantly, it gives the buyer time to build up to the higher payments. The cost to the home builder or seller to provide the 3-2-1 interest rate buy down is approximately 5% of the sale price Since many builders or sellers are willing to drop their prices by 5% or more to make the sale, this buy down is within the seller's capabilities. The advantage is the buyer will purchase the seller's house at 10% interest Instead of 13% during the first year, giving the seller a greater competitive advantage, while giving the buyer a greater perceived purchase value!


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