Legal Definitions - buy-down

A buy-down refers to an upfront payment made by a homebuyer to their mortgage lender at the time of closing. The purpose of this payment is to reduce the interest rate on their mortgage loan, either for a specific initial period or for the entire duration of the loan. By paying a lump sum upfront, the buyer effectively lowers their monthly mortgage payments and the total amount of interest paid over time.

• Example 1 (Temporary Rate Reduction):

  Sarah and Mark are purchasing their first home. While they qualify for a 7% interest rate on their 30-year mortgage, they anticipate their income will increase significantly in the next few years. To make their initial monthly payments more affordable, they decide to pay an additional $4,000 at closing. This payment acts as a buy-down, reducing their interest rate to 6% for the first three years of their loan. After three years, the rate will adjust to the original 7%. This upfront payment helps them manage their budget during the initial period of homeownership.

• Example 2 (Permanent Rate Reduction):

  David is buying a new construction home and has some extra savings from the sale of his previous property. He wants to secure the lowest possible interest rate for the entire 30-year term of his new mortgage. His lender offers him a choice: a 6.8% interest rate with no buy-down, or a 6.5% interest rate if he pays $2,500 upfront. David chooses to pay the $2,500, which is a buy-down, because he calculates that the long-term savings on interest over three decades will far exceed this initial cost, resulting in substantial overall savings.

• Example 3 (Strategic Business Investment):

  Maria is purchasing a small commercial building for her expanding bakery business. Interest rates for commercial mortgages are currently high, which would significantly impact her monthly operating costs. To improve her business's cash flow in the critical early years, she negotiates with her lender to pay a lump sum of $12,000 at closing. This payment serves as a buy-down, reducing her interest rate by 0.75% for the first five years of her 20-year commercial mortgage. This strategic move helps her allocate more funds to business operations and growth during a crucial phase.