A mortgage rate buydown is a financing arrangement that gives a borrower a lower rate for a certain number of years or for the life of the loan. The borrower pays mortgage points at closing to cover the difference between the standard rate and the lowered rate.
A buydown is a way for a borrower to obtain a lower interest rate by paying discount points at closing.
The structure will vary depending on whether you want a permanent or temporary mortgage buydown rate.
Discount points, also referred to as mortgage points or prepaid interest points, are a one-time fee paid upfront. In the case of discount points, the interest rate is lower for the loan term.
In an alternate form of buydown, the points purchased reduce the interest rate for a given amount of time at the beginning of the loan.
Buydowns are most beneficial when a seller or builder offers to pay the discount points on behalf of the buyer without significantly increasing the purchase price of the home. However, if the buyer intends to pay the points themselves, there are certain circumstances in which mortgage buydowns are more suitable.
