A FDM paid 1-0 buydown is a temporary mortgage rate reduction in which FDM covers the cost of lowering your mortgage payment rate by one percentage point for the first year of the loan. If your note rate is 7%, you’d pay as if your rate were 6% for the first twelve months, and then your payment would rise to the full 7% rate from year two through the end of the loan. The “1-0” describes this structure: 1% off in year one, 0% off afterward. It’s the simplest form of temporary buydown, alongside the more common 2-1 (two points off in year one, one point off in year two) and the 3-2-1.
The money for a buydown has to come from somewhere. Usually, it covers the difference between the reduced payment and the full payment, and it’s deposited into an escrow account at closing and drawn down each month during the first year. On a $400,000, 30-year loan at 7%, the principal-and-interest payment is about $2,661, versus about $2,398 at 6%, a difference of roughly $263 a month, or about $3,150 for the year. When the buydown is lender-paid, the lender funds that amount instead of the buyer or seller. If you refinance or sell the home before the 12-month period is over, the remaining buydown escrow funds are applied to your principal balance.
The FDM paid buydown will give you a 12-month break from higher mortgage payments. When mortgage rates improve, FDM will refinance your loan for free. Lower payments today. Possible lower rates in the future.