Buydown options

A buydown is a type of financing where the buyer or seller pays extra points (also called discount points) to reduce the interest rate on a loan. Permanent buydowns make it easier to qualify for a loan because they permanently lower a loan's interest rate. They can also allow you to buy more house for your money.

There are generally two types of buydowns: a permanent buydown and a temporary buydown. A permanent buydown lets you pay extra points to get a lower interest rate over the life of your loan.

A permanent buydown can be paid by the seller or the builder as an incentive to finalize a sale by providing lower monthly payments. Sellers can also benefit from assisting with a buydown with a difficult to sell property or during slower market conditions. It increases the buyers' ability to qualify for a loan, which also allows the home to be sold more quickly. Plus, the cost of a buydown offer is usually less than a similar price reduction of the home.

In a temporary buydown, you prepay interest in exchange for receiving a lower rate during the early years of a loan. The most common temporary buydown is called a 3-2-1, meaning the mortgage payment in years one, two and three is calculated at rates 3 percent, 2 percent and 1 percent, respectively, below the premanent rate on the loan. On a 2-1 buydown, the payment in years one and two is calculated at rates 2 percent and 1 percent below the loan rate. And on a 1-0 buydown, the payment in year one is calculated at 1 percent below the loan rate.