What does a Permanent Buy-Down refer to in mortgage financing?

A Permanent Buy-Down in mortgage financing specifically refers to the strategy of paying points upfront in order to secure a lower interest rate over the life of the loan. This technique involves one-time costs, known as points, where each point typically equals one percent of the loan amount. By paying these points at closing, the borrower effectively reduces their monthly mortgage payment and decreases the overall interest paid throughout the duration of the loan. This can be particularly beneficial for borrowers who plan to stay in their homes long-term, as the initial investment can lead to significant savings in interest costs over time.

The other choices do not align with the definition of Permanent Buy-Down. Mortgage insurance generally protects lenders from losses, discounts on closing costs do not directly influence the interest rate, and adjustable-rate mortgages have variable payments over time rather than a fixed reduction in the interest rate. Therefore, the core function of a Permanent Buy-Down is best captured by the payment of points to lower the interest rate.