Say someone sells you property, you pay them a certain amount each month for that property. You decide to give them the property for a lesser price than what it’s valued at. They pay a lower % amount upfront then you sell it off totally. Is there an economics term for this?
Your givens are a bit confusing, but this just looks like a discount for up-front buying, as opposed to following the standard % to price down payment, followed by a regular balance amortization inclusive of interest.
By saying it’s a discount sale, or a fire sale, or anything that causes the seller to receive less than what the assessor estimates, we are assuming that the standard for the industry is the % down payment, followed by regular balance payments at a standard interest rates.
The title was okay, the rest I’m not getting.
In a mortgage, you can pay more points [$] up front to get a lower %rate for the mortgage. In parlance, you’re “buying down” the rate. The bigger upfront payment lowers the risk for the lender and they will issue a lower rate loan. Similar, a 15 year mortgage has a lower %rate because the loan is in existence for a shorter time [less risk] and the principle is repaid faster [lower risk].
Is this what you’re looking for?
Agree completely. Nice explanation of buydown.
Here’s another possibility for what the rest of the post *might *have been trying to ask:
When someone borrows money to buy property, they can arrange for the payments to not actually pay off the entire loan. Instead the payments are smaller and/or fewer and at the end of them all a (big) lump sum is required to finish paying off the loan. This is called a “balloon loan” and the last big payment is called a “balloon payment.”
Example with semi-realistic numbers: Borrow $100K. Ordinary payments at ordinary interest rate would be 5% interest requires a $550/mo for 30 years to pay it off completely. Instead you can agree to borrow at 4% and pay just $400/mo for just 15 years. But at the end of those 15 years, you’d still owe $50K that you needed to pay all at once.
More realistically, instead of writing a check for the $50K at the end, which most people cannot afford, the intent would be to get a new loan to replace the old loan. Or to have already sold the property and have paid off the loan then.
The reason balloon loans have lower payments is mostly that you’re only paying off a part of the debt. But in addition because they’re typically for a shorter term, the risk to the lender of interests rates changing over time is less, so they’re willing to offer a lower rate. As smithsb already mentioned.
There’s also a “short sale” where the lender agrees to accept a smaller payment up front and forgive the rest. If you owe $100K on your property and you find someone willing to buy it for $75K, the lender might agree to accept the lower amount and cancel the rest, rather than dunning you for $25K on a property you no longer owe.