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(1.) An up-front cash payment made in order to reduce monthly payments on a mortgage loan. (2.) In a temporary buy-down, your payments are calculated at a lower interest rate than the actual rate on your loan. This makes your payments smaller. (3.) In a permanent buy-down, your rate might be reduced by about 0.25% for each thousand dollars or point you prepaid, but the reduction would last for the life of the loan. Permanent buy-downs are less common than temporary buy-downs.
Bankapedia's Take:Buy Downs can be confusing. First off, you are essentially pre-paying your mortgage payment, so from a strict financial standpoint there is little advantage. Why pay $15k up front to save $15k over the next few yrs in interest. The reason you typically see buy-downs is they allow people to qualify for a mortgage that given their income they normally wouldn't. If a lender has a Debt to Income cap of say 40% and given the borrowers income and expected payment puts them at 45%, a temporary buy down would allow the to qualify, even though it comes at the expense of out of pocket money.
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