What term describes the payment made by a borrower to reduce their interest rate for a temporary period?

The term that describes the payment made by a borrower to reduce their interest rate for a temporary period is known as a Temporary Buy-Down. This is a financing strategy often used in residential real estate where the borrower pays an upfront fee to effectively lower the interest rate on their mortgage for an initial period, usually the first few years of the loan.

A Temporary Buy-Down can make the mortgage payments more manageable at the start, which can be particularly beneficial for borrowers who expect their income to increase in the future or who may need assistance affording their monthly payments during the initial years. This buy-down can be structured in different ways, such as a one- or two-point reduction in the interest rate for a defined period, allowing borrowers to save money upfront and ease into their mortgage payments.

This concept contrasts with other financing terms: Prepayment refers to paying off part or all of the loan balance ahead of schedule; a Loan Origination Fee is a charge by a lender for processing a new loan application; and Amortization refers to the process of spreading loan payments over time. Each of these terms serves distinct financial roles but does not relate to temporarily reducing the interest rate in the same manner as a Temporary Buy-Down.