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Loan Glossary

Buydown:

The process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lower the rate permanently. In a Temporary Buydown, only a sufficient interest is paid to lower the payment for the first three years. The reason to Temporarily Buydown a loan is to lower the current payments thereby more easily qualifying for the loan. This usually makes sense because income will usually continue to increase as the interest rate does. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, two percent lower the second year, and one percent lower the third year.