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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.
References in periodicals archive ?
Special financing terms can include seller-paid points, installment sales, mortgage assumptions, wraparound loans, and interest rate buydowns. In this type of arrangement, the purchase price of the sale property may need to be adjusted before it can be used as an indication of market value.
These figures reflected a longstanding complaint of single-store owners -- their belief that they lack access to marketing dollars, promotions, buydowns and other special supplier programs that are more readily available to their chain counterparts.
The Legislature's "tuition buydowns" kept a damper on increases for five terms, but there's no plan yet to boost the buydowns to cover inflation, so tuition may be on the rise.
(70.) See Nick Simeonidis, Buydowns: A Practical Way to Discount Under Robinson-Patman, 21 ANTITRUST 36, 36 (2006-2007) ("Big Box competes on price.
Borrower credit--imprudent judgment regarding a borrower's ability to repay a loan, including unwise decisions regarding general creditworthiness, failure to consider non-purchasing spouses' liabilities, failure to verify properly Social Security numbers and failure to document borrowers' ability to handle increased payments in connection with interest rate buydowns;
Some common examples include sales incentive offers labeled as discounts; coupons, rebates, and free products or services; and slotting fee arrangements, cooperative advertising arrangements, and buydowns for sales price shortfalls.
But payments of closing costs and financing points--as well as the value of interest rate buydowns funded by builders or their affiliated mortgage companies--are subject to limits.
I think our government could do a lot more in terms of tuition lending and tuition-expense buydowns.
"We promote our products through a variety of formats including pre-packs, buydowns, on-pack merchandise, coupons and sweepstakes," says a company spokesman.
Dean Stalcup, senior vice president of business development for GreenPoint Credit, lenders lengthened loan terms and introduced seller buydowns with points being financed on contracts.
Loans are also available for acquisitions and mortgage buydowns.