AN INCREASINGLY popular method of reducing your early mortgage payments is the so called buydown. One of the more standard types, according to HSH Associates, is the 3 2 1 buydown that reduces the rate for two years at the beginning, I% each year. In the first year, you would pay 2% less than the mortgage rate; the second year, I%. In the third year, you would begin paying the full rate and continue to do so for the remaining life of the 30 year loan. The overall cost of the mortgage would be higher than what you would pay for a straight 30 year fixed mortgage, but the reduced starting rate may be worth the extra cost.
Another type of buydown, usually offered by banks and S&Ls requires you to deposit money in a non interest bearing account that the lender draws on each month to make up the amount of the monthly payment that you are, at first, unable to meet. For example, you give the lender $800 a month on a $ 1,000 per month loan the first year and $900 the second year. Accordingly, the money in the account is reduced $200 a month for the first year and $ 100 a month in the second year. After that, you cover the entire $1,000 payment each month.
Perhaps the most popular buydown of all is done with points, which are a prepayment of interest. The more points you can pay, the lower the rate.
A different type of home mortgage that could save you much money over the life of the loan is the biweekly mortgage. It allows a bank to deduct your house payments every two weeks from your checking account. Each payment is half of what you would turn over every month under a conventional mortgage. Since all months except February are a few days longer than four weeks, you make 26 payments a year, not 24. That, in effect, is an extra month's payment.
This could produce a big savings. Take a $ 100,000 mortgage at I I %. Your biweekly payments would be $476 and you would wind up paying $952 more a year than if your payments were monthly. But you would be able to retire your mortgage in about 20 years rather than 30. That works out to a savings in your interest payments of $95,000.
Particularly if you are a first time homebuyer or are returning to the housing market after many years, you will need to educate yourself further about the myriad types of mortgages and real estate terms. A sensible way is by reading a booklet called The Mortgage Money Guide, published by the Federal Trade Commission. It defines the 14 most popular types of mortgages without endorsing any one of them and lists the pros and cons of each. The booklet helps prospective buyers understand the fine print in mortgage contracts. There is also an easy to read page of mortgage payment tables. To get a copy of the guide send $1 to The Mortgage Money Guide, Consumer Information Center J, P.O. Box 100, Pueblo, Colorado 81002.
