In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Buydowns can be temporary or they can last the life of the loan. The purchaser can negotiate the deal directly with a lender, but sometimes a home seller arranges the buydown as an incentive to attract buyers. Those looking to buy a new home instead of a previously owned one may find that the builder will provide the incentives. Alan Cohen, a branch manager with Irwin Mortgage Corp. in Indianapolis, notes that companies in his market usually offer a few thousand dollars to consumers to put toward their mortgages.
Someone can use that money to buy down the loan rate for a couple of years.
A buyer could apply two points to the first year's payments and one to the second, resulting in a 5.5 percent interest rate the first year, 6.5 percent the second year and 7.5 percent all following years. That would help people who don't have much money now but expect to earn more later. Others who want to have a low rate for good can put the builder's money toward that end. Of course, the mortgage rate isn't the only thing that determines how much financing will set you back. Closing costs add a significant chunk of change to the final bill, so borrowers should try to minimize them, too.