All 3 of these loan types are collectively known as temporary buy down mortgages. They are types of mortgages with a series of initial, temporary interest rates that increase in a year- over- year fashion until a permanent interest rate is reached.
These loans are sometimes used as a method to help a borrower with excess cash and lower income to qualify for a mortgage. iLoan does not recommend using these loans for this purpose. We always recommend that our clients take loans where the permanent or expected interest rate is financially comfortable. However, there are certain circumstances where temporary buy down mortgages are a fit. In particular, they work well in instances where a homebuyer has upwardly mobile income (such as a doctor in residency).
Temporary buy downs use additional points to prefund an escrow account that is set up to subsidize the mortgage’s initial monthly payments. The longer a borrower will be using a subsidized interest rate, the larger the prefunded escrow account will be. Here is an example of how the temporary buy down loan options work:
These loans are not for everyone but when they find the right customer at the right time, it makes for a very happy closing.