If you are buying a home, you have probably looked at all kinds of ways to reduce your monthly mortgage costs. These can include putting down a higher down payment or improving your credit to get a lower interest rate. But did you know that you can actually pay to lower your interest rate by doing a buydown?
What is a Mortgage Rate Buydown?
A mortgage rate buydown is a financial agreement where an upfront payment is deposited into an escrow account or paid as points at closing in exchange for a lower mortgage interest rate.
Instead of waiting for overall market interest rates to drop, a buydown gives home buyers control over their initial or long-term monthly housing budget.
Mortgage buydowns generally fall into two main categories: Temporary Rate Buydowns (e.g., 3-2-1, 2-1, or 1-0 buydowns) and Permanent Rate Buydowns (Buying discount points).
Temporary Mortgage Buydowns
A temporary buydown reduces your interest rate for a specific introductory period—most commonly the first 1 to 3 years of your loan. After the temporary period ends, your mortgage note rate returns to its original fixed percentage.
How a 2-1 Temporary Buydown Works:
- Year 1: Your interest rate is 2% lower than the baseline rate.
- Year 2: Your interest rate is 1% lower than the baseline rate.
- Years 3–30: Your rate returns to the full full-term note rate.
- Year 1 (4.5% rate): Monthly principal & interest = ~$2,026 (Saves ~$502/month)
- Year 2 (5.5% rate): Monthly principal & interest = ~$2,271 (Saves ~$257/month)
- Year 3+ (6.5% rate): Regular monthly payment = ~$2,528
Permanent Rate Buydowns
A permanent buydown lowers your interest rate for the entire duration of your mortgage loan. To achieve this, you pay for mortgage discount points at closing.
- 1 Mortgage Point = 1% of your total loan amount.
- Paying 1 point typically lowers your interest rate by roughly 0.25% (this varies depending on market conditions and lender terms).
- Buying 1 point costs $3,000 upfront at closing.
- Your rate permanently drops to 6.25%.
- Your monthly payment decreases, saving you money every month for 30 years.
Pros and Cons of a Mortgage Rate Buydown
Benefits:
- Lower Initial Monthly Payments: Frees up cash flow when transitioning into a new home.
- Easier Budgeting: Gives buyers predictable payment increases during temporary buydowns.
- Leverage Seller Concessions: Sellers can pay for buydowns to help buyers manage high interest rates without reducing property value.
Cons:
- Higher Upfront Costs: If funded by the buyer, points increase total cash needed at closing.
- Risk of Early Refinancing: If interest rates drop and you refinance before reaching your break-even point, you lose the unused value of permanent points.
