What financing tool is used to temporarily lower the interest rate and monthly payments on a mortgage?

A temporary buy-down is a financing tool that enables borrowers to lower their interest rates and monthly payments for a specific temporary period during the initial years of the mortgage. This typically involves paying a lump sum upfront to the lender, which subsidizes the interest payments for the first few years of the loan term.

The primary advantage of a temporary buy-down is to make homeownership more affordable in the first years of the mortgage, especially for borrowers who anticipate their income to increase or an adjustment in financial circumstances that will allow them to comfortably handle higher payments in the future. This can also be beneficial in helping buyers qualify for a mortgage by lowering their initial monthly payment obligations.

In contrast, a permanent buy-down would involve paying upfront costs to lower the interest rate permanently for the life of the loan, which is different from the temporary relief that a temporary buy-down provides. A fixed-rate adjustment does not apply to this context as it refers to products that adjust rates after an initial fixed period, and subsidized loans typically involve governmental assistance programs rather than a temporary interest rate reduction strategy.