Buy Down
Last modified July 10, 2023A buydown is a mortgage financing technique which the buyer obtains a lower interest rate for at least the first few years of the mortgage buy "buying down " the interest rate. A buy down is a sum of money paid to the lender at closing to reduce the borrower's out-of-pocket monthly payment. A typical buy down is a two/one (2/1) which means the interest rate is bought down during the first year by two percentage points below the note rate, and during the second year by one percentage point. Starting with the third year, and continuing through the 30 year life of the loan, the rate will remain the same. A buy down can be very attractive to someone who needs a lower rate to qualify for the loan and may require lower payments the first few years. The negative side is that the cost for buy down is usually 2.5% of the loan amount, and the borrower ends up with a higher rate starting in year three than if they went with a fixed rate and used the 2.5% to obtain a lower rate.
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