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Cutting Mortgage Payments By Buying Down

Coming up with the cash to purchase a new home can be a real task. One way to create a bit of wiggle room is to lower your initial mortgage payments by buying them down.

Cutting Mortgage Payments By Buying Down

One of the current concerns regarding the real estate market is high home values. Specifically, many buyers can’t afford to purchase a home because of the financial burden. As buyers are priced out of the market, the concern is we will see a situation like the late 1980s were prices deflate at an alarming rate and the real estate bubble doesn’t so much pop, but instead plummets.

If you are considering buying a home, condo or whatever, you need to create a clear and objective budget of what it is going to cost you. Most people are smart enough to do this, but they make one error. They do not account for the fact they are going to need to make mortgage payments almost immediately after buying the property. Throw in high property taxes in some states and you can become short of cash quickly and easily.

One way to give yourself a cushion at the outset of your mortgage is to buy down the interest rate. The basic idea is to pay extra cash up front in the form of points on your loan. In exchange for doing this, the lender will reduce the interest rate for a particular period. The advantage of this approach is it gives you some time to rebuild your cash reserve by making lower monthly payments. It does not save you money overall, but it does buy you time. This can be particularly important if property taxes are due within a few months of your purchase.

A typical buy down situation comes in the form of a three year arrangement. By paying points up front, you can lower the interest rate on your mortgage for the first three years. For the first year, you might get relief of 3 percent of the loan, to wit, you would pay at a rate of 4 percent instead of 7. The second year of the loan would then see an interest rate increase as would the third year. After the third year, you would be back to paying the normal interest rate on the loan. By that time, you should have rebuilt your cash reserve and be in a better position to comfortably make your mortgage payments and have something set aside for those little emergencies that always pop up in life.

Obviously, the downside of buying down your interest rate is you need to come up with extra cash at the time of purchase. Many people are surprised to learn, however, that they can do so. If you are one, this might be a strategy you consider using.

Dan Lewis is with Great Western Mortgage - providing San Diego home loans.

This article is free for republishing
Source: http://www.articlealley.com/article_115846_19.html

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