Definition
A buydown is when someone (builder, seller, lender) pays points upfront to reduce your interest rate temporarily. A 2-1 buydown might offer 4% year one, 5% year two, then 6% year three and beyond. Buydowns are popular builder incentives.
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Common buydown structures include 2-1 buydowns (2% reduction year 1, 1% reduction year 2, full rate year 3) and 3-2-1 buydowns (3% reduction year 1, 2% reduction year 2, 1% reduction year 3, full rate year 4). The full rate applies for the remainder of the loan. Buydowns are popular in builder incentives.
Pro Tip
Buydowns can lower early payments and help qualify you; ensure you understand the full rate after the buydown period.
Example
A builder offers a 2-1 buydown on a 6% mortgage: payments are based on 4% for year 1, 5% for year 2, then 6% for year 3 and beyond.