A conventional fixed-rate mortgage offers you a set rate and payments that do not change throughout the life or "term", of the loan. A conventional loan is fully paid off over a given number of years, usually 15, 20 or 30.
A portion of each monthly payment goes towards paying back the money you borrowed, the "principal", and the rest is "interest". Any money paid into the value of the house, including your down payment, is known as "equity" in the home. For instance, if your house is worth $100,000 and you owe $65,000 on your mortgage, then you are said to have 35% equity in your house.
"Buydowns" usually refer to a borrower "buying down" the interest rate on a loan. This is the same concept as paying "points" on a loan, except that points buydown (or up) the rate of a loan over the entire term while a buydown is usually only a temporary reduction.
A temporary buydown on a loan is achieved by lowering the rate for the first few years, starting out at a lesser amount and gradually rising to the original loan rate. Of course, because the loan rate is lower for the initial few years, so are the payments. To make up this loss of funds to the lender, the buydown usually consists of extra monies paid up front to the lender when the loan closes. In return, the lender will let the borrower "qualify", or meet the criteria for the loan, at the new, reduced rate.
What is the Difference between a Second Mortgage and a Home Equity Line?
An example of a temporary buydown on a loan is a 2/1 Buydown. Assume we have a 30-year conventional loan with an interest rate of 9%. A 2/1 buydown would make the interest rate for the first year of the loan equal to 7%, the second year 8% and 9% from then on. The borrower could qualify for the loan (under some loan programs) as if it were a 7% loan.