What is the term for a reduction in the interest rate as part of a financing arrangement called?

The term for a reduction in the interest rate as part of a financing arrangement is referred to as a "Buy Down." This process involves the borrower or the seller paying upfront cash to lower the mortgage interest rate. By "buying down" the rate, the borrower can benefit from lower monthly payments, as the initial cash payment effectively subsidizes the interest owed on the loan.

In a buy down, the amount paid can be seen as a prepaid interest cost that reduces the overall interest expense over the life of the loan. This arrangement can be particularly attractive in situations where borrowers anticipate lower income or cash flow in the early years of the mortgage, allowing them to manage their finances more effectively.

By understanding what a buy down entails, borrowers can make more informed decisions about their mortgage options and negotiate better financing terms. It is essential for loan officers to be familiar with this concept to guide clients appropriately.