A mortgage rate buydown is a mortgage-financing technique used to give the buyer a lower interest rate for the first few years of the mortgage. The mortgage rate buydown buyer pays the lender money in exchange for a reduced interest rate, which may be structured in different ways. One example is a 3-2-1 buydown, in which the buyer pays to have lower payments on the loan for the first three years. If the mortgage is at a 7% interest rate for 30 years, the year one payment would be at a 4% rate, the year two payment at a 5% rate, and the year 3 payment at a 6% rate. Then at year 4 the loan would be at 7%, where it would remain for the duration of the mortgage. Further detail on mortgage rate buydowns can be found here.
[Last updated in July of 2020 by the Wex Definitions Team]