Adjustable Rate Mortgage Buydowns

One kind of home loan many buyers find attractive when financing their purchase is the adjustable rate mortgage, which provides a lower initial interest rate for a certain amount of time before it is readjusted. However, an ARM buydown could make the deal even better.

How an ARM Buydown Works

Some home sellers even offer ARM buydowns to potential buyers in need of financing. The concept is that a seller will pay a certain amount to a lender, who in turn offers the borrower/buyer a lower initial rate on their mortgage. However, it is important for the borrower to remember that the rate is not permanent. It will reset after the introductory period, so it is very important to plan accordingly.

Sellers use a buydown to help make the home more affordable through a lower mortgage rate, thus also making it easier to sell. A buydown will affect your adjustable rate mortgage, in that it lowers your initial rate–but then that rate goes back up to where it would have been had there been no buydown offer.

The Downside to ARM Buydowns

It isn’t uncommon for homeowners to experience a shock when the interest resets to a higher rate, as the monthly payment can go up significantly. The interest you pay on an ARM goes up and down with market conditions, so if your initial rate expires at a time when interest rates are adjusting upwards, you can see a serious rise in the cost of your mortgage.

Use a mortgage calculator that allows you to figure out your monthly payments before agreeing to any loan. A sudden and dramatic increase in your monthly expenses could turn your household finances upside down. Speak with a mortgage professional or lender to figure out a mortgage loan that fits within your budget and goals for owning a home. Be realistic with your expectations to avoid further complications in the future.