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Pros and Cons of Temporary Buydowns


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TERMINOLOGY

Temporary buydowns are a tool that lenders use to lower rates and make monthly payments more affordable. Temporary buydowns require a large cash investment in return for lower rates. One of the most popular types of buydowns is the 3-2-1 buydown, which lasts for the first three years of the mortgage. While this helps lower your rate for three years, your payment will increase for the last 27 years of the mortgage.  

Many people choose this option as a way to keep their monthly payments low for the first difficult years of a mortgage and prepare for other life factors to help them pay later. For example, if the wife is pregnant, the husband will benefit from reduced payments for a number of years. Once the wife is back at work and working full-time, the payments will increase but it will be manageable because the overall income of the household is greater. Here are a few pros and cons associated with temporary buydowns.

Pros

  • Helps those with cash - For those people who have a lump sum of cash, this is the perfect scenario. Even if you do not have a lump sum of cash at your disposal, you still might be able to get a temporary buydown. You could accept the money as a gift from a relative or the seller of the house. Regardless of who funds the account, you can still benefit from the lower payment and the help of the escrow account.
  • Lower monthly payment - A temporary buydown is a great way to make your monthly mortgage payment more manageable. Having a low monthly payment makes it easier to budget for other things that may come up. It presents an added layer of flexibility that most mortgages do not have. 

Cons

  • Get too much mortgage - Sometimes this type of loan can become overwhelming. This means that if you were not qualified for the mortgage at the beginning, you might be in over your head later, especially when life hands you unexpected circumstances.
  • Requires a lump sum of cash - This type of loan only works if you can come up with a great deal of cash on the front end. Many people do not have the cash to make this type of program work. They do not know anyone that would give them the cash and they do not have a seller that is motivated enough to do it for them.