Buydown

A type of financing where the buyer or seller pays extra points (often called discount points) in return for a lower interest rate

The low-down on buydowns is that they are commonly used to make qualifying for a loan easier since they lower a loan' s interest rate. There are two types of buydowns:
(1) a permanent buydown that lets you pay extra points in order to get a low interest rate over the life of a loan
(2) a temporary buydown is when you prepay interest in exchange for a lower rate on the first 2-3 years of a loan.

Often the builder, seller or lender, all who want to make the housing more attractive to buyers, will pay for the buydown. Also, the lower starting rate makes it easier to qualify for the loan.

If you can't qualify for a 30-year fixed, 7% interest loan for $250,000. But, the lender agrees to give you the loan at 5% interest for the first year, 6% interest for the second year and then adjust it to the normal rate of 7% the third year. In return, you must pay the difference between the market ($1,732) and buydown monthly payments ($1,445 and $1,587) for the first two years of the loan at closing.

Buydown account

An account that holds the money needed to pay monthly payments on a temporary buydown mortgage

In a temporary buydown mortgage, you pay some of the interest in advance in order to get a lower interest rate for the first two or three years of your loan. This sum is placed into a buydown account and is used towards the monthly mortgage payments.