A mortgage buydown is a financing technique where the borrower or a third party pays upfront to reduce the interest rate on a mortgage loan temporarily. This upfront payment is often made to the lender in the form of points or fees. There are typically two types of mortgage buydowns:
Temporary Buydown (or Rate Buydown):
In a temporary buydown, the interest rate is reduced for a specific period, usually the first few years of the loan term.
The buydown can be structured as a 2-1 buydown (2-1), 1-0 buydown (1-0), or any other variation.
In a 2-1 buydown, the interest rate is reduced by 2% in the first year, by 1% in the second year, and then it returns to the original rate for the remaining term.
Similarly, in a 1-0 buydown, the interest rate is reduced by 1% in the first year and then returns to the original rate for the remaining term.
Permanent Buydown:
In a permanent buydown, the upfront payment is made to permanently reduce the interest rate for the entire term of the loan.
This type of buydown is less common and may require a larger upfront payment compared to a temporary buydown.
The benefits of a mortgage buydown include lower initial monthly payments, making homeownership more affordable in the early years of the loan. This can be particularly helpful for borrowers who expect their income to increase in the future or those who need more flexibility with their budget during the initial period of homeownership.
