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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 ?
BANKING AND CREDIT NEWS-January 16, 2019-Newfi Lending launches 2-1 buydown program
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In essence, it is a fifteen-year fully amortizing fixed-rate mortgage with a permanent rate buydown instead of a down payment.
While Hurricane Florence hurt our bottom line results, that blow was softened by the ex-Florida retention buydown feature in our reinsurance program.
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.
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.
[(BuyDown = 1)] = [[beta].sub.0] + [[beta].sub.1]TRA[] + [[beta].sub.2] [] + [[beta].sub.3] []+[YearMoved.sub.t] + [MSA.sub.i] + [[epsilon]] (2)
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.