# Minnesota
Buydown Options
The
most common buydown is the 2-1 buydown. In the past, for a buyer
to secure a 2-1 buydown they would pay 3 points above current
market points in order to pay a below market interest rate during
the first two years of the loan. At the end of the two years they
would then pay the old market rate for the remaining term.
As
an example, if the current market rate for a conforming fixed
rate loan is 8.5% at a cost of 1.5 points, the buydown gives the
borrower a first year rate of 6.50%, a second year rate of 7.50%
and a third through 30th year rate of 8.50% and the cost would
be 4.5 points. Buydown were usually paid for by a transferring
company because of the high points associated with them.
In
today's market, mortgage companies have designed variations of
the old buydowns rather than charge higher points to the buyer
in the beginning they increase the note rate to cover their yields
in the later years.
As
an example, if the current rate for a conforming fixed rate loan
is 8.50% at a cost of 1.5 points, the buydown would 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% , or a three-quarter point
higher note rate than the current market and the cost would remain
at 1.5 points.
Another
common buydown is the 3-2-1 buydown which works much in the same
ways as the 2-1 buydown, with the exception of the starting interest
rate being 3% below the note rate. Another variation is the flex-fixed
buydown programs that increase at six month interval rather than
annual intervals.
As
an example, for a flex-fixed jumbo buydown at a cost of 1.5 points,
the first six months rate would be 7.50%, the second six months
the rate would be 8.00%, the next six months rate would be 8.50%,
the next six months rate would be 9.00%, the next six months the
rate would be 9.50% and at the 37th month the rate would reach the
note rate of 9.875% and would remain there for the remainder of
the term. A comparable jumbo 30 year fixed at 1.5 points would be
8.875%.
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