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A consumer guide and workbook - page 34 / 79





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Interest Rate Buy Down

A vendor—usually a new-home builder—pays the lender a lump sum to lower the mortgage interest rate by up to 3% over a fixed term, usually one to two years.

A payment of $2,000–$3,000 reduces your mortgage rate by about 2%, increasing the mortgage amount for which you qualify.

New-home builders may offer buy downs or discounts on the mort- gage rate to encourage sales. But vendor financing is usually not renewable, so you have to be pre-

pared to pay the going market rate when the mortgage is renewed.

However, the builder may add the amount into the price of the home and you may end up paying a higher mortgage principal.

Rate of Interest

Interest is the cost of borrowing money and is paid to the lender. Mortgage interest rates are affected by the prevailing market interest rates. Mortgage rates are either fixed or variable.

A fixed rate is locked in so that it will not rise for the term of the mort- gage.

A variable rate will fluctuate. The rate is set each month by the lender, based on the prevailing market rates. Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes toward the inter- est, and the percentage that pays down the principal, changes.

A variable rate can be a good choice if rates are high when you arrange your mortgage and then fall afterward. But if rates rise, you may want to convert to a fixed rate. Bear in mind that this can cost you a cash payment penalty.

If you select a variable rate, your

lender may restrict the mortgage amount to 70% of the purchase price of the home and require a higher down payment on either a conven- tional or a high-ratio mortgage.

Corrado and Maria were pre-approved by their lender for a mortgage of $100,000 and had saved $30,000 for a down payment.

They found a “fixer- upper” and made an Offer to Purchase of $110,000, conditional on a home inspection.

Also, some lenders offer a pro- tected or “capped” variable rate. This means your interest rate will not rise above a predetermined limit. However, you usually pay a premium for this protection.


The term of a mortgage is the length of time that certain factors, such as the interest rate you pay, are set at a

negotiated level. Terms usuall

y last anywhere

from six months to 10 years. At the end of the term you either pay off your mortgage or renew it, possibly

renegotiating its terms and condi- tions.

Generally, the longer the term the higher the interest rate. Many experts suggest you select a long term if inter- est rates are rising. If rates are falling, you may want to select a short term and then lock in the rate when you think rates won’t go any lower.

The inspection showed that the home needed a new furnace, updated wiring and plumbing, and other substantial interior and exterior repairs that would cost $60,000.

Corrado and Maria withdrew their offer and kept on looking.

Note that the term is not the amor- tization period.



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