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Understanding Points and Buydowns (2)

Buydowns are mortgage programs whereby a third party pays some points to reduce the buyer’s interest rate and thus help a home buyer qualify for the mortgage. For example, as a concession, a seller may pay four points to the lender, and the buyer gets a mortgage that is two percentage points lower than the standard rate for the first year, one percentage point lower for the second year, and then the full interest rate thereafter. This arrangement works best when the buyer anticipates that his or her income will increase over the next few years.

Paying points is not a practice limited to mortgage loans. Car dealers may advertise a lower (or zero) interest rate on new car loans as an incentive for sales. This means, as you probably guessed, that the dealer made an arrangement with the finance people, and you can be sure that the points have been built into the price.

Actually, anytime financing is involved in a purchase, points are often used as a sales tool. The bottom line is that you can use points and buydowns advantageously or they can lure you into thinking you’re getting a good deal when in fact you are not.

As mentioned previously, when you contact a mortgage lender and ask for a quote, likely you will get a buffet of rates and options. In addition to that day’s rate (par), the lender may tell you that you can lower the rate if you want to pay a point or two. Typically, a point lowers the interest around one-eighth of 1 percent, depending on the market that day.

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