A temporary mortgage interest rate reduction strategy allows borrowers to pay a lower interest rate for a specific period, typically the initial years of the loan. This is achieved by pre-paying a lump sum of interest upfront, effectively subsidizing the borrower’s monthly payments during that period. In a “1-0” structure, the interest rate is reduced by 1% in the first year of the mortgage term. For example, if the note rate is 7%, the borrower would pay 6% interest for the first 12 months. After that initial period, the rate returns to the original note rate for the remainder of the loan term.
This strategy offers several potential benefits, primarily improved affordability during the early years of homeownership. This can be particularly helpful for individuals or families anticipating income growth. It can also make homeownership accessible to a broader range of potential buyers who might otherwise be priced out of the market at the full note rate. Historically, these strategies have been employed during periods of higher interest rates to stimulate housing demand.
