A rate buydown is a mortgage financing technique that allows a borrower to obtain a lower interest rate by paying discount points at closing. Discount points, also known as mortgage points or prepaid interest points, are a one-time fee paid upfront. The buyer, seller, or builder pays the lender the difference between the standard interest rate and the lowered rate through points at closing. The buyer benefits from the reduced interest rate until the buydown expires, usually after a few years. There are different types of buydowns, including:

• Temporary Buydown: This type of buydown lowers the interest rate to a certain percentage, which then increases each year until it returns to the original rate. Common temporary buydown terms are 2-1 and 1-0, where the first number is the rate reduction you receive in the first year and the second number is the rate reduction for year two.

• Permanent Rate Reduction: In this scenario, the interest rate discount extends over the life of your loan, giving you a lower monthly payment during the entire amortization schedule. A 3-2-1 buydown is an example of a permanent rate reduction buydown.

Buydowns can be a good option for buyers who want to get a mortgage without significantly increasing the purchase price of the home or draining their cash reserves. However, buyers need to qualify for the home loan based on the full interest rate after the buydown expires. Its important to compare monthly savings with how long you plan to own the home before choosing to complete a rate buydown.