What does the term “buy down” refer to in real estate financing?

The term “buy down” in real estate financing specifically refers to the process of reducing the interest rate on a mortgage. This is typically done by paying upfront points or fees to lower the interest rate for the duration of the loan, which can result in lower monthly mortgage payments for the borrower.

Buy downs can be used strategically to make homes more affordable for buyers, especially in a situation where the market interest rates are higher. By lowering the interest rate, the overall cost of the loan is decreased, making it easier for the borrower to manage their finances.

While the other choices refer to different aspects of financing—such as lowering the loan amount, increasing equity, or extending the loan term—they do not specifically define the concept of a buy down, which specifically centers on interest rate reduction. By understanding this concept, borrowers can benefit from more favorable loan terms that align with their financial goals.