Buydown
Barron's Banking Dictionary:
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Buydown
Money advanced, usually by a builder, to reduce the borrower's monthly payment in the early years of a mortgage, below the level required for normal amortization. Buydowns are most prevalent in periods of high interest rates, when prospective home buyers might otherwise not qualify for a mortgage loan. Contrast with buy-up, which reduces points paid on a loan in exchange for a higher interest and higher monthly payments.
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A mortgage-financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage, but possibly its entire life. The builder or seller or the property usually provides payments to the mortgage-lending institution, which, in turn, lowers the buyer's monthly interest rate and therefore monthly payment. The home seller, however, increases the purchase price of the home to compensate for the costs of the buydown agreement.
Investopedia Says:
Buydowns are easy to understand if you consider them a mortgage subsidy made to the homebuyer on behalf of the seller. Typically, the seller contributes funds to an escrow account that subsidizes the loan during the first years, resulting in a lower monthly payment for the homebuyer. This lower payment allows the homebuyer to qualify more easily for the mortgage.
Most buydowns last for a period of one to five years, and the mortgage payments increase once the buydown expires.
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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