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 ?
* Buy-down to permanently reduce the interest rate to virtually zero percent
Tenders are invited for support programs that provide for the purchase of at devices, such as a low-interest loan fund, an interest buy-down program, a revolving loan fund, a loan guarantee, or an insurance program.
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
Bottom line: Agents, sellers and buyers should at least be aware of the buy-down option.
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CBC-affiliated buying groups also offer special buy-down opportunities to retailers.
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.
However, under the buy-down agreement the WB has converted the credit into grant with a support of Bill and Melinda Gates Foundation.
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.
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