What Are Buydown Loans?

Loan Types
Nontraditional Mortgages
Buydowns are a way to lower the interest rate on a home loan. They're also called interest-rate buydowns, mortgage buydowns, and discounted origination fees. You might call them "the best thing since sliced bread."
Published on
July 27, 2023
Copy link
What is a buydown?

A buydown is a loan feature that reduces the interest rate on the loan. It's usually offered in exchange for a lump sum payment at closing and is often used to reduce the interest rate on a fixed-rate mortgage. The borrower pays an additional amount above what they're required to pay each month toward principal, which decreases their monthly payments and essentially lowers their overall cost of borrowing money.

As an example, if you have $200,000 left on your mortgage after paying down $20,000 over several years through refinancing or home equity loans (and haven't done any repairs), your lender may agree to reduce your rate by 0.25% each year until it reaches 4%.

How do buydowns work?

Buydowns are loans that offer a lower interest rate for the first few years. They can help new homeowners get into their dream home more easily because they have a smaller monthly payment during those early years.

They're often used to help people buy homes, but you can also use them to refinance existing mortgages. If you don't plan on staying in your house for more than five years and want to save money on interest payments, then buydowns might be right for you. However, keep in mind that when using buydowns as part of an FHA loan or VA loan (Veterans Affairs) they may not be available with every lender or bank.

Buydown loans are only available on fixed-rate mortgages; variable-rate mortgages won't qualify because their terms change constantly over time based upon market conditions rather than being fixed at one rate until the end of your term. When dealing with credit unions or community banks—who usually offer lower rates because they aren't publicly traded—you should ask about whether buydown options are available before agreeing on a specific mortgage product.

How are buydowns different from adjustable-rate mortgages (ARMs)?

Buydown loans are fixed-rate mortgages. Adjustable-rate mortgages (ARMs) fluctuate in their interest rate based on the movements of an underlying index, typically the prime rate. For example, if you have a 5/1 ARM and your initial rate is 3.5%, then your first year's interest rate will be 3.5%. If the prime rate goes up over the next year, so will your loan—but only after one year of stability at that initial fixed rate.

Buydowns are often offered as part of a mortgage refinance, where there is enough equity in your home to use it as collateral for a new loan with better terms than what you currently have (lower interest rates and less or no points). ARMs are usually offered when someone purchases a house; this means there may not be much equity available for other purposes such as paying down debt or investing elsewhere, which could mean the difference between getting approved for an ARM versus being denied due to insufficient credit history or income levels needed to support higher monthly payments associated with adjustable-rate loans (such as those found with buydowns).

In short: if you want security in knowing exactly how much money each month will go towards paying off your home loan balance over time (and nothing else), then get yourself into something like a fixed rate mortgage instead!

What are the benefits of buydowns?

Buydowns can help you reduce your monthly mortgage payments. This may allow you to qualify for a larger loan and purchase a house that’s more expensive than what you would have been able to afford otherwise.

If the initial payment on your mortgage is too high, it may prevent you from being able to afford the house of your dreams. Buydowns can help with this issue by lowering the initial payment so that it’s within range of your budget. This makes it easier for potential buyers who might otherwise have been unable to get approved for a loan in the first place because their income wouldn't have met all requirements needed for approval.

A lower interest rate is another benefit offered by buydowns since they are often paired up with some type of fixed-rate loan product like VA loans or FHA loans—which means that if rates rise over time then so will payments made on these types of mortgages (as long as they're not adjustable).

A buydown loan might be a way to trim your mortgage costs during the early years of homeownership.

A buydown loan might be a way to trim your mortgage costs during the early years of homeownership.

A buydown loan is a home mortgage product that allows you to pay less interest during the first few years of your loan. This can help you save money on your monthly payments and may be a good option for people who are concerned about interest rates going up, as well as anyone who wants to spread out their payments over time without having to pay extra fees.

Conclusion

We’ve covered a lot of ground in this article, but I hope you feel more confident to take on the challenge of buying your first home. You can use the tips we discussed here to help make sure you get the best deal on your loan and don’t end up with any surprises along the way.


Get started today
Whether you're actively looking, or just researching, you can find out what you qualify for and get connected with a pro.
Apply Now
Questions? We have answers.
Tap into expert mortgage advice with just a click! Our specialists are prepared to simplify mortgages, answer your questions, and tailor the perfect financing solution for you.
Talk with a pro
Latest posts

Don't Stop Here

Check out some of these related articles.
A hand holding a small picture of a home.

The Difference Between Non-QM and Qualified Loans

Your mortgage does not have to be complicated! If you are interested in non-QM or qualified mortgages, we can help you understand the different options available to you.
Read post

Preparing for Natural Disasters: Essential Tips for Waterfront Homeowners

Get essential tips for disaster preparedness as a waterfront homeowner. Learn about the risks of natural disasters, the importance of insurance coverage, and how to make your home more resistant. Discover the importance of emergency preparedness and evacuation planning. Get advice on post-disaster recovery and protecting your property. Take proactive steps to safeguard your waterfront home.
Read post

Introduction to Hard Money Lending: What it is and How it Works

Hard money lending, a type of loan secured by real estate collateral often used by real estate investors who need quick access to funds. Learn about how it works, its advantages and disadvantages, and whether it could be a viable option for your financial needs.
Read post