Buy-Up

Definition

Buy-Up is a real estate financing strategy where the lender offers the borrower a rebate or payment of points in exchange for accepting a mortgage loan with an interest rate higher than the market rate. This payment, often called “negative points,” can help cover various fees and settlement costs, reducing the out-of-pocket expenses for the borrower at the closing of the loan.

In most buy-up arrangements, the lender absorbs specific closing costs by charging an increased interest rate over the life of the loan—a trade-off between initial expenses and long-term payments.

Examples

First-Time Homebuyer: Sarah, a first-time homebuyer, is short of cash needed for closing costs but qualifies easily for a mortgage loan. The lender proposes a buy-up arrangement where they cover the closing costs if Sarah agrees to a loan with an interest rate of 0.5% higher than the going market rate.
Investment Property: Robert is purchasing an investment property but wants to conserve cash for potential repairs and renovations. He opts for a buy-up loan where the lender pays upfront closing costs in exchange for a slightly elevated interest rate.

Frequently Asked Questions (FAQs)

What is the primary benefit of a buy-up mortgage?

The up-front cost savings are the primary benefit. Borrowers can reduce their out-of-pocket expenses for closing while managing a higher interest rate over the loan term.
How does a buy-up compare to buying points?

Buying points involves paying an upfront fee to lower the interest rate, while a buy-up entails accepting a higher interest rate for reduced or negligible initial expenses.
Are buy-up arrangements advantageous for all borrowers?

No, they are most beneficial to those lacking upfront cash but who can afford higher periodic payments due to an above-market interest rate.
Can I refinance a buy-up loan later on?

Yes, refinancing is possible and common; however, it’s important to consider the terms, fees, and any penalties for refinancing to determine cost-effectiveness.
Is the interest rate in buy-up loans fixed or adjustable?

Both fixed and adjustable interest-rate buy-up loans are available, depending on the borrower’s preference and the lender’s offerings.

Points: Fees paid upfront to reduce the interest rate of a mortgage. One point is equivalent to 1% of the loan amount.
Negative Points: Another term for the points or funds provided by the lender in exchange for a higher interest rate on the loan.
Closing Costs: Fees paid at the closing of a real estate transaction, including loan origination fees, appraisal fees, title insurance, and escrow costs.
Interest Rate Lock: An agreement between lender and borrower to lock in an interest rate for a specified period, protecting against rate increases before closing.
Mortgage Rebate: A refund given by the lender to the borrower at closing activities, often in combination with accepting a higher interest rate.

Online Resources

Investopedia: Comprehensive articles about mortgage points and buy-up arrangements.
Consumer Financial Protection Bureau (CFPB): Guidelines and tips for managing mortgage and buy-up options.
Bankrate: Mortgage comparisons and explanations of financing terms, including buy-ups.
NerdWallet: Mortgage tools and calculators, offering insights about closing costs and interest rates.
Zillow: Articles and tools providing detailed information regarding real estate transactions, buyups, and mortgage strategies.

References

U.S. Department of Housing and Urban Development (HUD)
Mortgage Bankers Association (MBA)
Consumer Financial Protection Bureau (CFPB)
Investopedia’s comprehensive dictionary of financial terms

Suggested Books for Further Study

The Mortgage Encyclopedia by Jack Guttentag
Mortgage Management for Dummies by Eric Tyson & Ray Brown
Real Estate Finance and Investments by William B. Brueggeman & Jeffrey D. Fisher
The Book on Rental Property Investing by Brandon Turner
Home Buying Kit For Dummies by Eric Tyson & Ray Brown

Real Estate Basics: Buy-Up Fundamentals Quiz

### What is a primary purpose of a buy-up loan arrangement? - [x] To lessen the upfront costs at closing. - [ ] To decrease the overall payout on a loan. - [ ] To lock in the lowest possible interest rate. - [ ] To eliminate the need for mortgage insurance. > **Explanation:** The main goal of a buy-up loan is to reduce the borrower's upfront costs at closing by accepting a higher interest rate over the life of the loan. ### When a borrower opts for a buy-up loan, what does the lender typically cover? - [ ] Monthly mortgage payments - [ ] Annual property taxes - [x] Closing costs - [ ] Principal amount of the loan > **Explanation:** The lender covers closing costs in exchange for the borrower accepting a higher interest rate over the life of the loan. ### What other term is used for points in a buy-up scenario? - [ ] Interest spiking - [ ] Mortgage rebate - [ ] Equity shredding - [x] Negative points > **Explanation:** Points given in a buy-up loan are referred to as 'negative points' as they provide a financial offset against closing costs. ### How does a buy-up mainly benefit borrowers? - [x] By minimizing initial out-of-pocket expenses - [ ] By reducing the overall interest paid on the loan - [ ] By speeding up loan approval times - [ ] By securing a variable interest rate > **Explanation:** Buy-up loans reduce initial out-of-pocket expenses at closing through concessions from the lender, in exchange for a higher interest rate. ### What should be considered when opting for a buy-up loan? - [x] The total cost over the loan's term - [ ] The need for private mortgage insurance - [ ] The term duration to qualify - [ ] The area and locality restrictions > **Explanation:** Borrowers should consider the overall cost implications over the loan’s life due to the higher interest rate. ### Buy-ups are ideal for borrowers who: - [ ] Want the lowest total loan cost - [x] Need to minimize initial cash expenses - [ ] Have extensive equity in the property - [ ] Prefer adjustable-rate mortgages > **Explanation:** Borrowers who aim to lessen their initial cash outlay find buy-ups advantageous, as they help cover initial closing costs. ### Are buy-up loans applicable to both fixed-rate and adjustable-rate mortgages? - [ ] No, only for fixed-rate mortgages - [ ] No, only for adjustable-rate mortgages - [x] Yes, they can apply to both types - [ ] No, it depends on the lender's policies > **Explanation:** Buy-up loans can be applied to both fixed-rate and adjustable-rate mortgages, contingent on the lender’s offerings. ### Which scenario best describes a buy-up arrangement? - [x] Sandra agrees to a 0.5% higher interest rate for zero closing costs. - [ ] Tom pays extra points upfront to reduce his mortgage interest rate. - [ ] Jake chooses a variable interest rate for lower initial payments. - [ ] Maria opts for no interest payments for the first ten years. > **Explanation:** Sandra's scenario, with higher acceptance of interest rate for no closing costs, epitomizes a buy-up arrangement. ### What is another name for the rebate or payment the borrower receives in a buy-up? - [ ] Base value rebate - [x] Mortgage concession - [ ] Prepayment discount - [ ] Foreclosure reversal > **Explanation:** The rebate or payment provided in a buy-up arrangement is commonly referred to as a mortgage concession. ### How might the total interest paid over the life of a buy-up loan compare with a standard loan? - [x] It is typically higher due to a raised interest rate. - [ ] It is generally lower because initial closing fees are paid by the lender. - [ ] There is no notable differences in total interest. - [ ] The borrower effectively pays less interest through a guaranteed rebate. > **Explanation:** Due to the elevated interest rates in buy-up loans, the total interest paid over the loan’s term is generally higher compared with standard loans.