RealTown Words

A financing technique used to reduce the monthly payment for the home-buying borrower during the initial years. Under some buydown plans a residential developer, builder, or the seller will make subsidy payments (in the form of points) to the lender that “buy down,” or lower, the effective interest rate paid by the homebuyer, thus reducing monthly payments for a set period of time. Builders reduce their profit on the sale or by adding part of this cost of doing business to the price of the home.

The amount of the interest supplement may remain fixed for the entire buydown period, or it may be graduated, with the amount of the subsidy declining each year. Buydowns are costly: for example, with certain lenders, a three-year buydown might carry 2.7 points for each one-percentage-point drop of interest.
Fannie Mae (the Federal National Mortgage Association) has developed its own buydown program