A buy-down agreement in mortgages is a financing arrangement that reduces your monthly mortgage payments by lowering your interest rate through an upfront payment made by a third party, such as a home builder, seller, or family member. This arrangement helps make your mortgage more affordable either temporarily or for the entire loan term.
There are two main types of buy-down agreements:
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Temporary Buy-Downs (e.g., 3-2-1 or 2-1 buy-downs): These reduce your interest rate for a limited time, often 1 to 3 years. For instance, a 2-1 buy-down lowers your rate by 2% in the first year and 1% in the second, returning to the original rate thereafter. Funds are held in escrow to subsidize the lower payments during the buy-down period.
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Permanent Buy-Downs (Discount Points): This involves paying discount points upfront to lower your interest rate for the entire loan duration. One discount point equals 1% of the loan amount and typically reduces your interest rate by about 0.25% per point. For example, paying two points on a $300,000 loan lowers the rate by approximately 0.5%, saving you money over the life of the loan.
Buy-downs are usually paid for by home builders (common in new constructions), sellers (as sales incentives), lenders (through promotions), or family members willing to help. This upfront cost is often integrated into the home price or negotiated as part of the sale.
Advantages for borrowers include lower initial payments, increased affordability, and no upfront costs for the buy-down itself. However, temporary buy-downs can lead to payment increases after the introductory period, so budgeting for future payments is critical.
For the parties paying the buy-down, it can accelerate home sales and retain property value better than a price reduction, though it requires significant upfront cash.
Before proceeding with a buy-down, ensure you understand the exact terms, future payment obligations, and how these compare to other financial options like a price reduction. Consulting your lender about the impact of buy-downs on your payment schedule is essential.
For more details on mortgage-related terms like discount points, see our Mortgage Points and Temporary Buydown Agreement articles. To understand broader mortgage costs, visit our Mortgage Closing Costs page.
Additional insights on this topic can also be found directly on ConsumerFinance.gov and the CFPB’s guide on mortgage buy-downs.