We temporarily buy down the rate using a 2-1 buydown. As a note to mention, any party of the transaction can provide the funds for the buydown account. The seller can agree to fund it, the buyer can come up with the money, or it can be a gift from a relative, or the lender can pay it. On occasion the borrower may not have the cash, a seller may not be willing to pay it, or there may be no gift funds available. So if you can fund the buydown yourself or from other sources, you can get a better rate, than if the lender funds the buydown account.
Variations are available.
These programs are available for owner occupants only. Because the rate is lower than then 30 year fixed, it helps buyers to qualify for a higher loan amount. Another rule regarding these programs is that they do not allow the buyer to have a second mortgage. This can be accomplished by either selling the property by the 7th or 5th year, or by refinancing the loan at that time at prevailing interest rates. Because the lender expects to get paid off in 7 or 5 years, you get a lower rate for the shorter risk the lender takes.