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A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness. In the context of project financing, refers to a one-time payment out of liquidated damages to reflect cash flow losses from sustained underperformance.


A prepayment on a loan, especially a mortgage, that reduces monthly payments thereafter. A buydown may temporarily reduce payments, for example, by reducing the loan's interest rate for a certain period. On the other hand, a permanent buydown reduces the interest rate by a lesser amount for the life of the loan. A buydown is often made by a third party, but this is not always the case.


When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it's called a buydown.

In a temporary buydown, your payments during the buydown period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller.

For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years.

Instead of an 8% rate in the first year, it would be 5%. In the second year, it would be 6%, and in the third year 7%. On a $100,000 loan with a 30-year term, a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535.

The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing -- in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase.

In a permanent buydown, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan.

You might choose to do a buydown if you had extra cash at the time you were ready to buy, but a smaller income than would normally allow you to qualify to buy the home you want.

In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase. In other cases, a home builder who is having trouble selling new properties might offer buydowns through a local lender to encourage reluctant buyers to take advantage of lower payments in the first years they own their homes.

References in periodicals archive ?
Finally, the legislature approved a tuition buy-down for the 2014-15 school year to keep the cost of postsecondary technical programs affordable for students
The sellers' buy-down cost them $13,600, an expense that under IRS rules was deductible by the buyers, and the sellers netted $36,000 more than they would have, if they had accepted the buyers' initial low offer.
Bill Gates, Co-Chair of the Bill and Melinda Gates Foundation, announced at the 39th Annual Meeting of the IDB Board of Governors, which was held on 25-26 June 2014 in Jeddah, the proposed establishment of a US$500 million grant Buy-Down Facility under IDB.
Contributing to the sales success at APEX is a newly-streamlined budget and creative buy-down program which has lowered the monthly common charges at the building.
For one large energy client, she fashioned a deductible buy-down program that attracted reinsurers and enabled the client to cut its retention to a desirable level.
The credits are converted into grants through the IDA buy-down program of Bill and Melinda Gates Foundation upon achievement of project objectives.
It is a Seller funded Buy-Down of the Buyer's Interest Rate.
However, under the buy-down agreement the WB has converted the credit into grant with a support of Bill and Melinda Gates Foundation.
In partnership with Shelter Mortgage, Holiday Builders is bringing homebuyers the dream of homeownership through this exciting rate buy-down financing program.
Buy-down mechanism: The IBRD loan buy-down mechanisms was developed to increase the flexibility and concessionality of funding for projects where it is justified by global public good or cross-border externalities.
2-million Biodiesel PACE program, which will provide up to $650,000 in interest buy-down for a biodiesel plant, by providing $400,000 combined with $250,000 in regular PACE; an income tax credit of 10 percent per year for up to five years, or 50 percent of direct costs for biodiesel sales equipment, such as pumps, hoses and tanks purchased by retailers; an income tax credit for any fuel supplier that blends biodiesel fuel to the ratio of five percent; and a sales tax exemption on the sale of new equipment to any facility that will enable the facility to sell diesel fuel containing at least two percent biodiesel fuel.
These loans have even higher debt-to-income ratios than a typical high loan-to-value mortgage and a three-year subsidy buy-down that reduces the initial interest rate as much as 1.