What does a buy-down refer to in real estate?

A buy-down in real estate refers to a subsidy that effectively lowers the mortgage interest rate for the borrower. This process typically involves paying an upfront amount to reduce the interest rate on a loan for a specified period or for the entire term of the loan. By lowering the interest rate, a buy-down can make monthly mortgage payments more affordable, which can be especially appealing for buyers who may be concerned about their budget or fluctuations in interest rates. It can be used as an incentive by sellers to make their property more attractive to prospective buyers, as well as a strategy for lenders to facilitate the sale of a loan.

This concept plays a significant role in real estate financing and offers potential advantages to both buyers and sellers, making it an important element to understand in the context of mortgage transactions.