Buydown
Buydown, as the term implies, is when the seller ‘buys down’ monthly mortgage payments by providing payments, usually for the duration of one to five years, to the mortgage-lending institution. Once the payments are made to an escrow account to subsidize the loan, then the interest rate is dropped automatically. The homebuyer, then, is able to pay lower monthly payments as a result until the buydown period is over. After that, the monthly payments will increase, or essentially, go back to what they originally were.
This financing technique is a way for the seller to sell his or her property faster. Buydowns also allow the buyer to qualify easier for mortgage loans as well as increasing the chances for more buyers to be able to pay off at a lower interest rate. But there is also a catch to it. What usually happens is that seller often ups the purchase price as a way to compensate for the costs of the buydown. So in the long run, the buyer will have to pay more for the price of the mortgage, but he or she is able to have a home sooner than without the buydown agreement.
However buydowns are not limited to the seller. Buyers also have the power to “buy down” the interest rate. Some lenders may not qualify the loan to buyers because they do not meet the income qualifications. However, the buyer may have extra cash set aside that can be used to buydown. This reduces the interest rate. Some buydowns are permanent and are set up to reduce interest for the entire life of the loan. In this kind of buydown, the reduction in the monthly interest is not very large. Other kind of buydown is temporary. The interest rate is set up to be reduced only for the first few years, as a way in convince the lender that the buyer somewhat looks promising enough to pay off at least in the first few years.
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