In an interest rate buy down, a buyer typically pays 3 points above the current market in order to pay an interest rate below the market during the first two years of the loan. Then at the end of the two year term, the buyer would then pay the old market rate for the rest of the term of the loan. This is the most common buy down, called the 2-1 buy down.
For an example, if the market currently is trading a fixed rate loan at 8% and at a cost of 1 point, the buy down would allow the borrower of the loan to pay 6% the first year, 7% the 2nd year, and 8% the third year through the rest of the loan (typically 30 years). The cost of this would be a total of 4 points.
Many mortgage companies have constructed different variations of older buy downs. Instead of charging higher points to the buyer at the start of the loan, they increase the loan to cover yields in later years.
The 3-2-1 buy down is another typical buy down. This method works similarly to the 2-1 method. The difference is that with this note, the interest rate starts at 3% below the present loan rate. For further information on interest rate buy downs, please give me a call so that I may refer you to a specialist!