A financing arrangement where upfront money is paid to temporarily or permanently reduce the mortgage interest rate.
Full Definition
A buydown reduces the borrower's interest rate either for the life of the loan (permanent buydown via discount points) or for an initial period (temporary buydown). The most common temporary buydown is the 2-1 buydown: the rate is reduced by 2% in year one and 1% in year two before returning to the full rate in year three. For example, on a 7% loan, year one would be 5%, year two 6%, year three and beyond 7%. The funds for a temporary buydown are typically paid by the seller or builder as an incentive. The money is placed in escrow and applied to the borrower's monthly payments to make up the difference. Temporary buydowns can help buyers manage early payments in a tight budget.
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