Buy Down

Business / Taxes / Buy Down: When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it’s called a buy down. In a temporary buy down, your payments during the buy-down period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller. For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years. Instead of an 8% rate in the first year, it would be 5%. In the second year, it would be 6%, and in the third year 7%. On a $100,000 loan with a 30-year term, a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535. The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing — in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase. In a permanent buy down, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan. You might choose to do a buy down if you had extra cash at the time you were ready to buy, but a smaller income than would normally allow you to qualify to buy the home you want. In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase. In other cases, a home builder who is having trouble selling new properties might offer buy downs through a local lender to encourage reluctant buyers to take advantage of lower payments in the first years they own their homes.

Other Words for Buy

Buy Noun Synonyms: purchase, acquisition
Buy Verb Synonyms: purchase, acquire, obtain, get, procure, gain, come by, secure
MORE

Builder Buydown Loan

Business / Finance / Builder Buydown Loan: A mortgage loan on newly developed property that the builder subsidizes during the early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the prevail MORE

Buydown

Business / Real Estate / Buydown: A financing technique used to reduce the monthly payments for the first few years ofa loan. Funds in the form of discount points are given to the lender by the builder or seller to buy down or lower t MORE

Leveraged Buyout

Business / Taxes / Leveraged Buyout: A leveraged buyout occurs when a group of investors using borrowed money, often raised with high yield bonds or other kinds of debt, takes control of a company. These buyouts are usually hostile takeo MORE

Links
Home
Glossary
Thesaurus