What is a buy-down mortgage?

A buy-down mortgage is a financing option where the borrower pays an upfront fee to reduce the interest rate on their mortgage. This payment effectively "buys down" the interest rate, resulting in lower monthly payments. Typically, the reduction in the interest rate is structured for a specific period, often the initial years of the mortgage, which can provide significant savings for the borrower, particularly in the early stages of the loan.

This strategy can be advantageous for borrowers who anticipate an increase in income over time or expect to refinance before the term of the buy-down expires. By lowering the initial interest payments, it can make homeownership more affordable in the short term, easing financial strain during the initial years.

The other options do not accurately describe a buy-down mortgage. For instance, increasing the loan amount could refer to a different type of financing strategy, while a lender agreeing to lower the interest rate over time pertains more to other mortgage variations, such as adjustable-rate mortgages. In the instance where lower fees are retained while keeping a higher rate, this would not align with the concept of a buy-down, which is specifically about reducing the transaction's interest rate upfront.