The term “buydown” is used to describe some mortgage programs that allow for an advance payment to reduce monthly payments in the early years. The “buydown” money (usually a number of “points”) is paid in advance and used to subsidize or reduce the monthly payments. For instance, a 2-1 buydown would require 3 additional points to be paid in advance. The first year’s payments would then be reduced by approximately 2/3 of the buydown amount (divided by 12 months), and the second year’s payments would be reduced by approximately 1/3 of the buydown amount (divided by 12 months). The remaining payments would be at the full payment amount. There are also “lender-funded buydowns.” These mortgages are at a higher interest rate than regular fixed rates. In exchange for a slightly higher rate over the life of the loan, the lender reduces the borrower’s payments in the early years.

BENEFITS:

Buydown loans are used to reduce the initial payments and to allow a borrower to “qualify” for a larger loan. These programs have the benefit of reduced initial payments in the early years while still receiving the security of a fixed interest rate. They can be the right choice for some, although the upfront payment is often prohibitive (unless it is a lender-funded buydown). Sometimes a third party, such as the seller or builder, can pay the buydown.