Financing Sources... BuyDowns

Mortgage loan buydowns are used to reduce the rate of interest a buyer must pay on a new mortgage loan. They have been used extensively in recent years by builders with new homes to sell. For example, suppose a builder has a tract of homes for sale and the interest rate on home loans is 16½%, as they were in 1982. At that interest rate, he is finding few buyers. What he can do is to arrange with a lender to pay the lender enough money so that the lender can offer the loan at a lower interest to the buyer. This could take the form of a 12½% interest rate for the first 3 years of the loan. Not only is 12½% more attractive than 16½%, but more buyers can qualify for loans at 12½% than at 16½%. Although the buy-down is costly to the builder, it will help sell homes that might otherwise go unsold. Moreover, a buy-down will usually boost sales more than a price reduction of like amount. Hopefully, loan rates will drop before the three years expire and the buyer can refinance. If not, at least the buyer has a loan.

Buy Downs To Growing Equity