What is the purpose of a buydown in a mortgage?

A buydown in a mortgage primarily serves the purpose of reducing the interest rate during the initial years of the loan. This reduction can make it easier for borrowers to afford their monthly payments at the beginning of the mortgage term. Often, this is achieved by paying an upfront fee that effectively lowers the interest rate, either for a specified period (temporary buydown) or throughout the duration of the loan (permanent buydown).

In the context of a temporary buydown, the interest rate is lowered for the first few years before returning to the original rate, allowing borrowers to benefit from reduced payments when they might be experiencing a tight budget or adjusting to new financial circumstances.

The other options do not accurately describe the function of a buydown. For instance, a buydown doesn't aim to increase the loan amount, extend the loan terms, or provide a larger down payment. Instead, its main intent is to alleviate the mortgage burden in the initial phase by reducing the interest applied to the loan. This helps borrowers manage their financial commitments more effectively at the start of homeownership.