**Buydown
Options**

The
most common buydown is the 2-1 buydown. In the past, for a buyer
to secure a 2-1 buydown they would pay 3 points above current
market points in order to pay a below market interest rate during
the first two years of the loan. At the end of the two years
they would then pay the old market rate for the remaining term.

As
an example, if the current market rate for a conforming fixed
rate loan is 8.5% at a cost of 1.5 points, the buydown gives
the borrower a first year rate of 6.50%, a second year rate
of 7.50% and a third through 30th year rate of 8.50% and the
cost would be 4.5 points. Buydown were usually paid for by a
transferring company because of the high points associated with
them.

In
today's market, mortgage companies have designed variations
of the old buydowns rather than charge higher points to the
buyer in the beginning they increase the note rate to cover
their yields in the later years.

As
an example, if the current rate for a conforming fixed rate
loan is 8.50% at a cost of 1.5 points, the buydown would give
the buyer a first year rate of 7.25%, a second year rate of
8.25% and a third through 30th year rate of 9.25% , or a three-quarter
point higher note rate than the current market and the cost
would remain at 1.5 points.

Another
common buydown is the 3-2-1 buydown which works much in the
same ways as the 2-1 buydown, with the exception of the starting
interest rate being 3% below the note rate. Another variation
is the flex-fixed buydown programs that increase at six month
interval rather than annual intervals.

As
an example, for a flex-fixed jumbo buydown at a cost of 1.5
points, the first six months rate would be 7.50%, the second
six months the rate would be 8.00%, the next six months rate
would be 8.50%, the next six months rate would be 9.00%, the
next six months the rate would be 9.50% and at the 37th month
the rate would reach the note rate of 9.875% and would remain
there for the remainder of the term. A comparable jumbo 30 year
fixed at 1.5 points would be 8.875%.