Buy-down

Buy-down

It is the term used when the lender brings down the rate of interest on the fixed rate mortgage for a temporary period. For the balance period the borrower's payment is calculated at note rate. In order to facilitate this, a lump sum payment is made and kept in an account which helps to supplement the borrower's monthly payments. These funds are sourced out from the seller or elsewhere as an incentive to buy their property. When the initial sum is paid by the lender, it is called the 'lender funded buydown'. This is possible because the note rate on the loan, tafter taking into consideration all adjustments, is higher than the exisitng market rate. The reason for doing this is that it will help in getting the borrower to qualify for the start rate and thus for a higher loan amount. Also, the borrower maybe expecting his earnigns to increase considerably in the future but would prefer a lower payment right now.