Unformatted text preview: impounded funds that are established at closing.
Dynasty School (www.dynastySchool.com) 6-13 REAL ESTATE FINANCE BUY–DOWN PERIOD
What is meant by the buy–down period? This is the period that the borrower will be paying an interest rate below the note rate. There is no fixed buydown period. It can be as short as 3 years or as long as 10 years, but many of those who purchase mortgages in the secondary market have limited the period to 3 years. BUY–DOWN INTEREST RATE
Many times the real estate professional will see the buy–down advertised as 3–2–1, which means that the first year's effective interest rate to the borrower or the rate that will be used to qualify the borrower will be three percentage points below the market rate offered by the lender. Thus, the second year the rate on the borrower's effective rate would be two points below the rate on the note; and finally in the third year of the mortgage, the borrower would be paying an effective rate of 1 percent below the rate on the note. Thus, with this type of mortgage, the borrower would not pay the full note rate until the 37th payment or at the beginning of the fourth year. Why is it important to lower the first–year interest rate? This is the rate the lender will use to qualify the borrower. In late 1983 and early 1984, many builders and lenders started to offer deep buy–downs extending over 5 to 10 years. For example, a builder might offer an 8–6–4–2 buy–down. Many of the mortgage insurers and purchasers of mortgages in the secondary market felt that this deep payment level may in a few years expose the borrower to payment shock. Under this program, the borrower would be qualified at a rate eight percentage points below the note rate. Let us assume the note rate was 13.250; the borrower would be qualified at 13.250 percent less 8 percent or 5.25 percent. This rate would increase in the second year to 13.250 less 6 percent or 7.25 percent and so on through the 4– year buy–down period. M...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10