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

The financing tool that is used to temporarily reduce the interest rate and monthly payments on a mortgage is known as a temporary buy-down. This arrangement allows the borrower to lower their initial interest rate for a specified period during the loan's term, which in turn reduces their monthly mortgage payment. Typically, this is structured by prepaying some of the interest upfront, either by the borrower or sometimes by the seller, which effectively "buys down" the interest rate for the initial years of the loan.

A temporary buy-down can be especially useful for borrowers who anticipate an increase in their income in the future or for those who need a lower payment during the early years of homeownership, making it more manageable to afford their mortgage. It provides immediate financial relief and can serve as an incentive in a competitive housing market.

In contrast, options like fixed-rate mortgages provide stable payments throughout the duration of the loan without any initial reduction in the rate. Adjustable-rate mortgages may offer lower initial payments but typically adjust after a certain period and can lead to higher payments in the long term. Home equity loans are separate loans that allow homeowners to borrow against their equity but do not directly reduce the interest rate or payments on the original mortgage.