Buydown


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Buydown

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.

Buydown

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.

Buydown.

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 ?
The 20-year loan has no rate buydown, but requires a 2 percent upfront payment to purchase mortgage insurance for the life of the loan.
The state of North Dakota, acting through Bank of North Dakota (the STATE) is soliciting proposals for a software solution to administer the escrow services or interest buydown on the PACE (Partnership in Assisting Community Expansion) loan programs.
At age 30, the borrower buys his or her first home with a WBHL, ideally using savings for a buydown of the interest rate, and continues with matched 401(k) contributions.
Apps can be time consuming and expensive for agencies to build themselves, so the Kansas Big I looked at using association funding to either buy an exclusive app or provide a buydown cost for agencies to build their own.
Noting that the building has an attended lobby, rooftop terrace, gym and onsite parking ,Richard Gorsky who leads the RCG Longview team, said, "By streamlining the budget, we were able to create significant savings which combine with the new five-year Common Charge Buydown program to produce a compelling incentive for buyers to move forward today.
NY1 took a tour of L Haus, where there is a 3-2-1 rate buydown, which allows people to get a reduced mortgage rate for the first three years.
To head off potentially disastrous prices in the coming year, the cooperative is also attempting to institute a crash crop-acreage buydown for the 2005 potato planting.
All have buydown promotions aimed at reducing the retail product price, but Sequenzia admits there are regional considerations.
Rule 21 certification also enhances the eligibility of the company's DFC products for state incentive programs, such as the California Public Utility Commission's Self Generation Program and the CEC's Emerging Renewables Buydown Program.
Among the major provisions: removal (through the end of 2006) of the requirement that an FSA borrower has to "graduate" to a commercial lender; an extension of a requirement, through 2011, that USDA earmark a certain portion of FSA loans for beginning farmers; offering an interest-rate buydown program on certain loans; and, prohibiting USDA from collecting any payments under shared appreciation agreements, through December 31, 2002.
Programs include: the Solar Energy and Distributed Generation Program, which funds solar domestic water heating systems and distributed generation equipment that meet efficiency and environmental specifications; Renewable Energy Buydown, which funds photo-voltaics and solar thermal generating systems, small wind turbines (output [less than]10kW) and fuel cells using renewable fuels; Cool Savings Program, which provides incentives for cool roofing and building materials that reduce air conditioning load; and Innovative Peak Load Reduction Proposals Program, which offers a maximum of $4 million for proposed projects that reduce peak electricity demand at a minimum of 20 kilowatts (kW).
With financial aid from the Housing and Urban Development Department, coming in the form of a 30 percent equity buydown to people who would build back in the wiped-out area, the downtown area has made a dramatic change for the better.