The buydown is a mortgage-financing aid in which the homebuyer or another third party (usually the seller or builder) makes subsidizing payments to the lender so that the buyer's interest rate and, therefore, monthly payment are lowered. The lower interest rate can last for the first few years (known as a temporary buydown) or for the full term of the loan. Typically, buydowns last from one- to five years after the loan is closed. One of the more familiar structures is the 3-2-1 buydown, where the interest rate is 3 percent lower than the note rate (the interest rate that the borrower agreed to pay) of the loan for the first year, 2 percent lower during the loan's second year, and 1 percent lower during the third year of the loan, after which the interest rate reverts to the note rate for the remainder of the life of the loan.

Generally, the funds for the subsidizing payments are paid at closing and placed into an escrow account, out of which payments are made to the lender over the time that the buydown is in effect. Although buydown payments are often made by the property seller, the buyer still ultimately pays in the form of a higher purchase price.