What is an arrangement that allows funds to be deposited to reduce monthly payments during the early years of a mortgage?

What is an arrangement that allows funds to be deposited to reduce monthly payments during the early years of a mortgage?

• A. Temporary Rate Buydown
• B. Cash Reserve
• C. Fixed Buydown Plan
• D. Adjustable Rate Plan

Answer: (A)

The arrangement that allows funds to be deposited to reduce monthly payments during the early years of a mortgage is known as a temporary rate buydown. This financial mechanism enables borrowers to lower their initial monthly mortgage payments, typically during the first few years of the loan term, by using funds deposited into an escrow account that subsidizes the mortgage payment. In a temporary rate buydown, a portion of the interest is prepaid, effectively lowering the interest rate for a specified time period, such as one to three years. During this time, the lower rate results in diminished monthly payments, which can ease the financial burden on borrowers, often helping them manage cash flow as they transition into homeownership. The other options represent different mortgage-related concepts. Cash reserves refer to liquid assets that can provide a cushion for borrowers but do not directly lower monthly payments. A fixed buydown plan could imply a permanent decrease in the interest rate, rather than a temporary reduction. An adjustable rate plan involves fluctuating interest rates over the life of the loan, which does not involve subsidizing payments in the early years. Thus, the temporary rate buydown is the correct concept regarding the question asked.

The arrangement that allows funds to be deposited to reduce monthly payments during the early years of a mortgage is known as a temporary rate buydown. This financial mechanism enables borrowers to lower their initial monthly mortgage payments, typically during the first few years of the loan term, by using funds deposited into an escrow account that subsidizes the mortgage payment.

In a temporary rate buydown, a portion of the interest is prepaid, effectively lowering the interest rate for a specified time period, such as one to three years. During this time, the lower rate results in diminished monthly payments, which can ease the financial burden on borrowers, often helping them manage cash flow as they transition into homeownership.

The other options represent different mortgage-related concepts. Cash reserves refer to liquid assets that can provide a cushion for borrowers but do not directly lower monthly payments. A fixed buydown plan could imply a permanent decrease in the interest rate, rather than a temporary reduction. An adjustable rate plan involves fluctuating interest rates over the life of the loan, which does not involve subsidizing payments in the early years. Thus, the temporary rate buydown is the correct concept regarding the question asked.