What is "buydown"

n. 1 (context finance English) An accelerated repayment of the principal of a loan. 2 (context mortgage finance English) A payment by a third-party to a lender to reduce some of all of the payments otherwise required, especially in first few years of the loan, thereby enhancing the apparent quality of the loan.

A buydown is a mortgage financing technique where the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage. The seller of the property usually provides payments to the mortgage lending institution, which, in turn, lowers the buyer's monthly interest rate and therefore monthly payment. This is typically done for a period of about one to five years. In a seller's market the seller might raise the purchase price to compensate for the costs of the buydown but in most markets it would not be to their advantage to use a buydown as an enticement if they are going to offset the benefit by raising the price. In most cases, the buydown does not even involve the seller. It is an arrangement between the lender and the buyer.

You may also use the buydown option on a refinance.