Which technique is used to temporarily lower the initial interest rate on a mortgage or deed of trust?

• A. Buy downs
• B. Open end loan
• C. Graduate payment mortgage
• D. Reverse mortgage

Answer: (A)

A buy down is used to temporarily lower the interest rate on a mortgage. In this arrangement, funds are paid upfront to reduce the rate for a set period, making initial payments more affordable. For example, a 2-1 buydown lowers the rate by two percentage points in the first year and by one point in the second year, then the rate returns to the note rate in year three. This can help with qualifying or cash flow early on, after which the loan settles at the normal rate. The other structures listed don’t create a temporary, upfront rate reduction: one is a line of credit, another features payments that gradually rise, and the last involves no required payments from the borrower.