A buydown is a mortgage financing option that some borrowers use to lower interest rates. The lower rates can be for the first several years of the mortgage or its entirety.
Buydowns can sometimes be offered as a subsidy of sorts for a long-term mortgage by property developers and sellers. This will lower monthly payments on a property and allow more prospective buyers to qualify more easily for a mortgage. It can in certain circumstances help improve the speed of selling the property by making its price more attractive.
There are a few different common types of mortgage buydowns. This includes the 3-2-1 buydown, the 2-1 buydown, or via using mortgage discount points.
With the 3-2-1 buydown, a buyer will receive lower payments on the loan for the initial 3 years. For every year within the 3-year period, the interest rate will increase by 1%. By the time the 4th year of the mortgage has arrived, the full interest rate will be applied.
A 2-1 buydown is very similar to the 3-2-1 buydown but with a different timeframe. The discount a buyer will receive will be valid for the initial 2 years. During the first year of the mortgage, the buyer will receive a 2% rate discount. In the second year, the buyer will receive a 1% discount.
Alternatively, a buyer can use mortgage discount points which can be obtained by paying a fee upfront at the time of closing. Usually, 1 mortgage point equals 1% of the total mortgage amount. This will reduce the rate throughout the lifespan of the mortgage.