A reduction in the interest rate of a loan is referred to as a buy-down. A payment made when the loan is taken out, either by the borrower or the lender often compensates this reduction . This payment is known as buying discount points, when it is made by the buyer.
Discount point or Origination point
Discount point, which is also referred to as origination point or simply point, is the fee paid at the time of borrowing. One discount point is equivalent to one percentage of the loan amount. If in case it is a permanent buy-down then buying one point can lower one’s interest rate by about 0.125% over the term of the loan.
Buy-downs are mostly temporary
However, most buy-downs are temporary. Only for the first few years the reduction in rate is applicable. A reduction in interest rate for the first two years of the loan is referred to as 2/1 buy-down. When the reduced rate is applicable for almost three years, then it is referred to as a 3/2/1 buy-down.
