Buydown VS. Guaranteed
While these two mortgage types start the homebuyer off at one rate and increase the rate over time, one of these types of mortgages may be right for you.
Buydown - Type of mortgage loan where the loan rate is reduced by paying more up-front at closing and is increased by one percent each year for the period set for the loan product. For example: For a 2-1 buydown at an 8% rate, Year 1 the rate is 6%, Year 2 the rate is 7%. For Year 3 through the life of the loan, the rate is 8%.
Qualification rules for the loan programs remain the same. Depending on the lender, the buyer may qualify using the reduced rate. (Example: For a 3-2-1 Buydown at a rate of 8%, the buyer could qualify using the 5% rate.)
The difference between the actual payment schedule and the rate schedule is usually paid "up-front" at closing. This can be paid by the seller, the buyer, the homebuilder, or in some cases, the lender. If the cost is borne by the lender, it is usually offset with increased rates or in points. Generally the funds used to buy down the loan are held in a separate account and are applied with the borrower's payment to equal the true interest rate.
Graduated Payment Mortgage (GPM) - Type of mortgage loan where the mortgage payments increase gradually for a period established in the loan product, typically five years. This is a negatively amortizing loan, which means that the difference between the interest paid and the interest due is deferred and added to the loan balances. Because of this, your loan amount will increase once you start paying off the loan; it will amortize normally at the end of the loan period. These loan products are more popular when the interest rates are higher, providing a financial incentive for potential buyers.
Since many lenders will qualify a buyer at a lower rate, a buyer can secure a larger mortgage. These loan types are good for those buyers who expect their incomes to increase to cover the increase in loan amount.