DEFINITION of 'Buydown'

A mortgage-financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage, but possibly its entire life. The builder or seller or the property usually provides payments to the mortgage-lending institution, which, in turn, lowers the buyer's monthly interest rate and therefore monthly payment. The home seller, however, increases the purchase price of the home to compensate for the costs of the buydown agreement.


Buydowns are easy to understand if you consider them a mortgage subsidy made to the homebuyer on behalf of the seller. Typically, the seller contributes funds to an escrow account that subsidizes the loan during the first years, resulting in a lower monthly payment for the homebuyer. This lower payment allows the homebuyer to qualify more easily for the mortgage.

Most buydowns last for a period of one to five years, and the mortgage payments increase once the buydown expires.

  1. Real Estate

    Land plus anything on it, including buildings and natural resources.
  2. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  3. Mortgagor

    An individual or company who borrows money to purchase a piece ...
  4. Origination

    The process of creating a home loan or mortgage. During the origination ...
  5. Initial Rate Period

    The period of an introductory or "teaser" interest rate on a ...
  6. Mortgagee

    An entity that lends money to a borrower for the purpose of purchasing ...
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