Buydown vs. GPM
While these two mortgage types start the homebuyer off at one rate and increase the rate over time, one of these types of mortgages may be right for you:
Buydown
- Type of mortgage loan where the loan rate is reduced by paying more up-front at closing and is increased by one percent each year for the period set for the loan product. For example: For a 2-1 buydown at an 8% rate, Year 1 the rate is 6%, Year 2 the rate is 7%. For Year 3 through the life of the loan, the rate is 8%.
Qualification rules for the loan programs remain the same. Depending on the lender, the buyer may qualify using the reduced rate. (Example: For a 3-2-1 Buydown at a rate of 8%, the buyer could qualify using the 5% rate.)
The difference between the actual payment schedule and the rate schedule is usually paid "up-front" at closing. This can be paid by the seller, the buyer, the homebuilder, or in some cases, the lender. If the cost is borne by the lender, it is usually offset with increased rates or in points. Generally the funds used to buy down the loan are held in a separate account and are applied with the borrower's payment to equal the true interest rate.
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