Interest Rate Buydown Definition

Interest Rate Buydown Definition

Interest rate buydowns are used to help you qualify for a larger loan and obtain a higher priced home. Buydowns allow you to pay extra points up-front in return for a lower interest rate for the first few years.

Since the additional points you pay are tax deductible, there are some tax benefits. People relocating due to employment often obtain buydowns. Employers sometimes pay the extra points as part of a relocation package.

The most common buydown program is the 2-1 buydown. With this program the interest rate is reduced 2 percent during the first year and 1 percent the second year.

For example, if you obtain a 2-1 buydown on a 30-year, fixed, 8 percent mortgage, the rate is 6 percent the first year, 7 percent the second year and 8 percent thereafter.

Some companies offer a 3-2-1 buydown. This reduces your rate 3 percent the first year, 2 percent the second year and 1 percent the third year.

There are many variations of buydown programs. Some buydown programs result in interest rates changing every six months as opposed to every year.