A mortgage buydown is an arrangement between a buyer and lender to lower interest rates on mortgage payments. In most cases the buyer is given the option to make an up-front lump sum payment in exchange for a lower interest rate over a period of time on their mortgage loan. By reducing the interest rate the buyer will now have a lower monthly payment on their mortgage and with a lower monthly payment it is easier for the buyer to be approved for a home. A buydown may range anywhere from a percentage of a point to a full point. When determining how much of a buydown to purchase one has to consider a) how much they are able to pay upfront and/or B) how much they would like to lower their monthly payments by.

Most people find themselves taking this route when they are looking for an interest rate that is lower than what their credit rating or monthly income will allow them to get, and when they have cash available at the outset. For those with good credit ratings, some may buydown in order to obtain a rate that is lower than the current market rates.

A buydown can either be temporary or permanent. A temporary buydown will reduce your interest rate and payments for a specific period of time after whic
h the interest rate and payments will go up. A permanent buydown will last the life of the loan and reduce your payments for the entire life of your mortgage. What one needs to consider when deciding to get a temporary or permanent buydown is the length of time that you intend to stay in the house. If you have a 30 year mortgage and there are prospects of selling the house after 5 years then it would be more beneficial for you to do a temporary buy down that will lower your payments for just the period that you intend to be in the house.

New home builders and some sellers have been known to offer no-cost mortgage interest buydowns. The home builder offers to buydown mortgages for new home buyers to help them qualify for a home and also help them with lower monthly payments. In some cases these may be temporary therefore it is very important that you thoroughly understand the terms of the buydown that is being offered.

Another key benefit of buydowns is that the money paid for the buydown can be declared as mortgage interest, allowing for a larger tax deduction. While a buydown has many benefits it may not be the best option for everyone. For some people the reduction in the payment is not significant enough and they find it more beneficial to have the cash in hand rather than put it towards a buydown.