A temporary buydown allows borrowers to reduce their effective monthly payment for a limited period of time. In a temporary buydown, the effective interest rate that a borrower pays during the early years of the mortgage is reduced as a result of the deposit of a lump sum of money (called a "subsidy") into a buydown account, a portion of which is released each month to reduce the borrower's payments.
A common temporary buydown is a “2/1 Buydown” which means that the payment is calculated at an
interest rate of 2% less than the note rate for the first 12 months, and 1% less than the note rate for the
next twelve months. The actual note rate and monthly payment that the borrower is obligated to pay is
never actually reduced but the buydown subsidy is applied to the payment. At the end of the buydown
period, the buydown funds collected at closing will have been exhausted, and the buydown period ends.
A common temporary buydown is a “2/1 Buydown” which means that the payment is calculated at an
interest rate of 2% less than the note rate for the first 12 months, and 1% less than the note rate for the
next twelve months. The actual note rate and monthly payment that the borrower is obligated to pay is
never actually reduced but the buydown subsidy is applied to the payment. At the end of the buydown
period, the buydown funds collected at closing will have been exhausted, and the buydown period ends.