Temporary Buydown
In a temporary buydown, the borrower prepays the interest in order to obtain a lower interest rate for the first few years of the loan. The buydown agreement and funds are collected at closing and placed in escrow during the duration of the temporary buydown.
The money in the account is used to compensate the monthly payments as stated by the mortgage note.
Temporary buydowns are useful to people who are purchasing a home, but don't have enough income in relation to their monthly expenses, in order to adhere to lender guidelines. To use a temporary buydown, the borrower must have access to extra cash. The cash can be furnished by the borrower, or any other source, including the seller of the subject property. The cash funds an escrow account from which the payments that supplement the borrower's payments are drawn. While the borrower's payments are lower in the early stages of the mortgage, the lender still makes the same profit on the loan money as they would have without the use of the temporary buydown. The reduction in mortgage payments is made up by the money in escrow.
If properly done, the money in escrow earns a positive interest rate, saving the borrower some money over the course of the loan. Borrowers have to look at these carefully because lenders have different ways of dealing with escrows, some of which may not be beneficial. To be sure that you obtained the best mortgage loan, consult one of our mortgage professionals. We will happily answer all of your financing questions.
