What is a buydown in mortgage financing?

A buydown in mortgage financing refers specifically to a temporary reduction in the interest rates of a mortgage. This is typically structured so that the borrower pays a lower interest rate for the initial years of the loan. Essentially, a buydown involves a payment made upfront or periodically to subsidize the interest, resulting in lower monthly payments for the borrower during this initial period.

This can greatly benefit homebuyers who may anticipate an increase in income or who want to ease their financial burden as they move into a new home. After the buydown period ends, the interest rate usually reverts to the original higher rate, which is outlined in the loan agreement.

In contrast, other options do not accurately describe a buydown. An adjustable rate mortgage refers to loans where the interest rate can change at specified times, a penalty for late payments is a charge incurred if payments are not made on schedule, and a fee to expedite closing refers to costs associated with speeding up the loan process. None of these alternatives reflect the concept of a buydown, making the understanding of a temporary reduction in interest rates the correct interpretation.