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What Is a Mortgage Buydown?


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TERMINOLOGY

A mortgage buydown is a term that your loan officer or bank will probably discuss, so it is important to know what it means and whether it is right for your loan.

What Is a Mortgage Buydown?

A mortgage buydown is essentially paying to have a lower interest rate. You will pay an upfront fee and in return get a lower rate on  your loan. This lower rate is temporary however. You will take the current rate being offered, perhaps 5.5 percent, and then buy it down to 3.5 percent. The loan will be fixed at 5.5 percent for the entire thirty years, but the first year it will be at 3.5 percent, then the second year it will be 4.5 percent, and then the third year it will expand to the initial rate of 5.5 percent for the rest of the life of the loan. The difference is the actual interest rate, and the lower rate, must be paid by the buyer or the seller at closing. So a lump sum will be paid and in exchange the buyer has a lower rate for a few years.