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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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.


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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved


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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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If increasing your use of Realtors and brokers doesn't bolster sales, and if you're not inclined to throw in optional features for free, try helping buyers with closing costs, points, or rate buy-downs. Mortgage insurance programs and secondary market agencies allow some "seller concessions," even if the value of the concessions winds up in house prices.