Tennessee Realtor State Practice Exam

What is the main benefit of using a buydown on a mortgage?

1. Lower monthly payments

2. Reduced property taxes

3. Immediate equity

4. Lower closing costs

The correct answer is: Lower monthly payments

Using a buydown on a mortgage primarily allows borrowers to achieve lower monthly payments. This occurs because a portion of the interest upfront is prepaid, effectively lowering the interest rate for a specified period or throughout the life of the loan. This results in reduced monthly payments, making the mortgage more affordable for the borrower over time. By purchasing points (the buydown), the borrower pays interest upfront, which compensates the lender for accepting a lower monthly payment in the future. This strategy is particularly beneficial for buyers who anticipate an increase in income in the future or those who wish to improve their cash flow in the early years of homeownership. While other factors like reduced property taxes, immediate equity, and lower closing costs can impact a buyer's overall financial picture, they do not offer the specific direct monthly payment relief that a buydown provides, making lower monthly payments the central advantage of utilizing this mortgage strategy.