How Mortgage Buydowns Differ From ARMs & Discount Points

Q: We are shopping for a home and mortgage rates have not come down like we wished. I was told we could benefit from a mortgage buydown. Is that like an adjustable rate mortgage? Susan, Bloomfield, NJ

A: A temporary mortgage buydown is similar to an adjustable-rate mortgage (ARM) in that the borrower’s monthly payments change over time. However, a key difference between ARMs and mortgage buydowns is what happens to the interest rates of the mortgage loans over time. With an ARM, the interest rate and the monthly payments can change periodically for the entire life of the loan, whereas, with a mortgage buydown, the interest rate never changes. Instead, the seller, lender or builder pays part of the borrower’s interest payments in the first year or two or three of the mortgage loan, but the underlying interest rate remains the same.

Home sellers can also pay discount points as a sales incentive for home buyers. Unlike mortgage buydowns, paying discount points permanently reduces the interest rate on a mortgage loan. Thanks for your question, Susan.

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