A buy-down mortgage is a financing strategy in which a third party—often the home seller or builder—pays an upfront fee to the lender to reduce the borrower’s mortgage interest rate. This reduction can last for a set period (temporary buy-down) or the entire loan term (permanent buy-down), resulting in lower monthly payments.
Temporary buy-downs, like the common 2-1 or 3-2-1 buy-downs, reduce your rate by a set percentage during the first few years, then revert to the standard note rate. The funds paid upfront are held in escrow and used by the lender to subsidize your payments during the reduced-rate period. This helps buyers ease into mortgage costs, especially useful when incomes are expected to grow.
Permanent buy-downs involve paying discount points (each typically equal to 1% of the loan amount) upfront to lower the interest rate for the loan’s duration. This approach requires a larger initial payment but offers long-term savings by decreasing the total interest paid over 15 or 30 years.
Buy-down mortgages benefit buyers by lowering monthly payments, sellers or builders by making properties more marketable without cutting prices significantly, and lenders by receiving upfront fees. However, buyers should be cautious about increasing payments after temporary buy-down periods end and consider refinancing options.
Understanding mortgage points, which are closely related to permanent buy-downs, can offer deeper insight into how discount points affect interest rates. Also, seller incentives like buy-downs are a form of seller concessions, which have limits based on the loan type and program.
For full details on regulations, consult Fannie Mae guidelines and IRS resources. Buy-down mortgages can be a smart tool when understood and leveraged correctly but always review the loan terms carefully and plan for future payment increases.