A buydown is a mortgage loan financing technique which allows the buyer to obtain a lower mortgage interest rate for the first few years (usually one to five) of the home loan. In exchange, the financial institution, lender or broker offering the mortgage usually expects a monetary payment to compensate for the lowered interest rate.
In some cases, the home seller provides the money payment but usually the house buyer provides it, often by increasing the overall borrowed amount of the home mortgage loan.
The buydown does make some sense for many buyers. However, as the rate increases each year, the mortgage payment increases. But, most homeowner’s incomes also increase on an annual basis. Furthermore, most home purchases incur a variety of associated expenses which tend to make available funds particularly scarce during the first few years of owning a house. However, homeowners should be aware that a buydown offers a lower interest rate, and hence lower payment, only for a fixed initial period. Your mortgage loan payments will increase like clockwork throughout the buydown period.