Question: My sister is getting a home loan from a mortgage company.

Her monthly payment/gross income ratio is 42% with 8.25 % 30yr fixed. The loan officer suggested a buy down in which her first year payment will be based on 6.25 % and 7.25 % at the 2nd year and finally 8.25 % in the beginning of third year. The difference due to the lower rate for two years is about $2,200 which she has to pay at the time of closing. The whole purpose is to lower the ratio so she could get the loan approval.

My questions are; 1. Is the $2,200 tax deductable ?

2. How does the equity build up in this case ? Is it based on 6.25 % or 8.25 % in the first year ? ( He said they will set up a separate account for that $2,200 and every month they will take out some money and combine with her montly payment to make 8.25 % payment.)

3. What will be the total interest payment for 1996 ? Based on 6.25 % or 8.25 %?

Answer: I would have to disagree with Mr. Frankel.

A buydown is simply paying the difference of your payments up-front over the time period indicated. Your sister is not throwing away her money, and this may be the only way she can qualify and get a fixed rate mortgage.

The following figures are an example only:

Suppose your sisters full P&I payment on a $100,000 mortgage at 8.5% = $769 P&I on a 7.5% mortgage = $699 P&I on a 6.5% mortgage = $632

Difference in payments is $70 per month from 8.5% to 7.5%; from 8.5% to 6.5% is $137.

Buydown cost is 12 months x $137 (for the 2 part of the buydown) = 1644 Buydown cost is 12 months x $70 (for the 1 part of the buydown) = 840

Total cost of 2-1 buydown is $2484.

I’m not sure of the tax ramifications.

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