Definition:
A buydown is a financing strategy in which the borrower pays upfront fees to lower the mortgage interest rate temporarily or permanently.

Example:
Suppose Mike qualifies for a mortgage at a 7% interest rate, but he pays extra upfront (called discount points) to permanently lower the rate to 6.5%. Alternatively, a temporary buydown might reduce his payments to 5% the first year and 6% the second year, returning to the full 7% afterward.

Explanation:
In real estate, buydowns help borrowers reduce their monthly mortgage payments by paying extra money upfront, typically as prepaid interest or discount points. There are two main types: temporary and permanent. Temporary buydowns lower interest rates temporarily (often for the first 1-3 years), gradually increasing until reaching the original rate. Permanent buydowns reduce the interest rate for the entire loan term.

Sellers, builders, or buyers themselves can pay for buydowns, commonly used as negotiation tools to attract buyers or make loans more affordable.

Importance:
Understanding buydowns is essential because they can significantly lower monthly payments, improving affordability and purchasing power. Homebuyers benefit by reducing their initial mortgage burden, potentially allowing them to qualify for more expensive homes. Sellers can use buydowns strategically to make their property more attractive, especially in competitive markets.

However, buyers should carefully consider whether upfront costs justify long-term savings, based on how long they plan to own the home.

In short, mortgage buydowns provide financial flexibility, offering buyers reduced monthly costs and helping sellers facilitate attractive, quicker sales.