What is Buy-Down Mortgage Loans?
A buydown is an initial lump-sum payment, which allows the lender to reduce the interest rate on a mortgage loan. The borrower "buys down" the interest rate on a mortgage by paying discount points up front. The builder or seller of the property usually makes this buydown payment to the mortgage-lending institution. The lender then lowers the buyer's mortgage interest rate. To compensate the home seller, the purchase price of the home is increased to compensate for the costs of the buydown agreement.
There are two types of buydown mortgages: A temporary buydown is a mortgage where a payment is made to reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown is an initial payment that reduces the interest rate over the entire life of a mortgage.
Either type of buydown mortgage can be vastly appealing to homebuyers who suffer sticker shock when they see what their mortgage payments will be for the life of the loan. By buying down their loan with points, they reduce those payments. The points up front will likely be recouped over the life of a 15- or 30-year mortgage, so this is an especially attractive option for customers who have a long time horizon for their home purchase.
A buydown can also be thought of as a subsidy on a 15- or 30-year fixed mortgage, and is made to the homebuyer on behalf of the seller. The subsidy is a fund that the seller contributes to an escrow account. A buydown is attractive to borrowers who believe they will be able to afford a larger home payment in several years, but presently are wary about making monthly payments at the higher current mortgage rate. Most buydowns last one to five years, and the mortgage payment increases at the end of the initial loan term.
Buydown mortgages, once perceived as an advantageous financial choice, have been surpassed by more flexible mortgage loan options.