The Real Estate Encyclopedia
What Is A Buy-down Mortgage?
Category - Home Buying Questions - General Home Buying FAQ's

A buy-down mortgage is a financing technique, which is used to reduce the monthly payment for the borrower during the initial years.  Under some buy-down plans a residential developer, builder or 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. 


As interest rates climbed during the late 1970s and early 1980s, many families could not qualify for the loan necessary to buy a home.  As an example, during that time, builders assisted buyers by offering a loan at 12 percent interest in a 15 percent interest market.  The builder could do this by reducing the profit on the sale or by adding part of this cost of doing business to the price of the house.  Typically a lower interest rate may be offered for a period of two or three years, at the end of which the interest goes to the original rate. If interest rates have dropped after three years, the homebuyer might consider refinancing the loan. 


Fannie Mae (The Federal National Mortgage Association) has developed its own buy-down program. 

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