This method allows borrowers to reduce their monthly payments by paying points upfront, which can either lower the interest rate for a specific period or for the entire loan term. Typically, the borrower pays additional points—where each point equals 1% of the loan amount—to secure a more favorable interest rate. For example, a borrower might pay points to reduce their mortgage interest rate from 4% to 3% for the first five years, making the loan more affordable during that time.
Interest Rate Buydown Example
For instance, if a borrower takes out a $250,000 mortgage with a standard interest rate of 5%, they might pay points to reduce the rate to 3% for the first two years. This would result in significantly lower monthly payments during the initial period before the rate reverts to the original 5%, helping the borrower manage their cash flow more effectively in the early years of homeownership.