1. Upfront Payment: Another party pays an upfront payment at closing.
2. Interest Rate Reduction: In exchange for the upfront payment, First Federal Bank will lower the interest rate on the mortgage for a specified period. We do 3-2-1 buydowns, 2-1 buydowns, and 1-0 buydowns.
A common buydown might be a 2-1 buydown, where the interest rate is reduced by 2% in the first year and by 1% in the second year before reverting to the original rate from the third year onward. The lowering of the rate is temporary.
3. Temporary Benefit: The reduced interest rate provides you with lower monthly mortgage payments during the initial years of the loan. This can make homeownership more affordable in the short term.