The Real Estate Encyclopedia
What Is Better: A Buy-down or an Adjustable-rate Mortgage?
Category - Mortgage Questions - Mortgage Loans FAQ's

A buy-down mortgage is a financing technique, which is used to reduce the monthly payment for the borrower during the initial years.  Under some buy-down plans a residential developer, builder or seller will make subsidy payments (in the form of points) to the lender that “buy down” or lower the effective interest rate paid by the homebuyer, thus reducing monthly payments for a set period of time.  This type is mostly used in high interest markets and it may not make much sense when interest rates a low. 

The danger of an adjustable rate mortgage is that, depending on the terms of the mortgage, your payments may go up sometimes substantially, if interest rates rise.  The mortgage crisis in 2007 provides a clear example of the dangers of adjustable mortgage rates, when thousands of homeowners lost their homes because their interest rates increased leaving them unable to make their mortgage payments. 

In markets when interest rates are affordable, the best and safest approach for a buyer is to shop for the lowest 30-year fixed interest mortgage loan.1

 

 



References
 
Category(s)
Mortgage Questions - Mortgage Loans FAQ's
Home Buying Questions - General Home Buying FAQ's
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