When a customer chooses to buy down the rate, are we required to include that $ amount paid to the APR? I am thinking we are...

Yes.

Thank you rockchalk--can you tell me where to find this in the REG? I cannot find where it says this.

The fee to buy down the rate would be discount points. Points are finance charges. See 226.4(b).

Thank you Dan.

So, if the customer recieves a credit for having chosen a higher interest rate would this reduce the APR?

As a footnote to this discussion, don't forget there are at least 4 different buydown scenarios and Reg Z treats them all differently.

Consumer buydowns Probably the most common form of buydown is the case where lender and borrower agree to a number of points with a corresponding reduction in the interest rate. The borrower pays the points and the lender drafts the note showing the bought-down payment schedule. The buydown agreement is part of the legal contract between the parties, so your TIL calculations reflect both the cost of the buydown and the reduced payment schedule resulting from the IR reduction.

Seller buydowns - two party Occasionally, sellers will offer to pay points so the buyer/borrower can enjoy a lower IR and payments, BUT the lender is not a party to the agreement. The buydown agreement is struck between the seller and buyer, only. Because the seller's contribution is not covered by a contract with the lender, the TIL must assume the borrower is paying the points. Regardless of who pays the points, the note and TIL calculations should reflect the bought-down payments.

Seller buydowns - three party In this case, the buydown agreement includes seller, buyer/borrower, and the lender. Providing this agreement transfers the obligation to pay points from the borrower to the seller, the "seller's points" exclusion applies and these points are excluded from the TIL calculations. The note and TIL calculations should reflect the bought-down payments.

Lender buydowns Under certain market conditions, lenders are willing to absorb the cost (points) of a buydown. Because this arrangement is memorialized in the contract documents, the TIL calculations should not reflect the cost the lender absorbed. The note and TIL calculations should reflect the bought-down payments.

Thank you