A mortgage rate buydown is a financing strategy that allows a homebuyer (or sometimes a seller or builder) to reduce the interest rate on a mortgage—temporarily or permanently—by paying an upfront fee at closing. The goal is simple: lower monthly payments, especially during the early years of homeownership when budgets may be tighter.
Mortgage rate buydowns have become increasingly popular in higher interest rate environments, as they help make homeownership more affordable without changing the purchase price of the home.
How a Mortgage Rate Buydown Works
In a buydown, a lump sum is paid at closing to “buy” a lower interest rate. This payment is often referred to as discount points, with one point typically equal to 1% of the loan amount. In exchange, the lender agrees to reduce the interest rate according to the terms of the buydown.
The cost of the buydown depends on several factors, including the loan amount, the interest rate reduction, and whether the buydown is temporary or permanent.
Temporary Mortgage Rate Buydowns
A temporary buydown reduces the interest rate for a set period at the beginning of the loan, usually the first one to three years. The most common structures are:
- 3-2-1 Buydown: The interest rate is reduced by 3% in year one, 2% in year two, and 1% in year three before returning to the full note rate in year four.
- 2-1 Buydown: The rate is reduced by 2% in year one and 1% in year two, then returns to the full rate in year three.
- 1-0 Buydown: The rate is reduced by 1% for the first year only.
Temporary buydowns are often paid for by sellers or builders as a concession to attract buyers. They can be especially helpful for buyers who expect their income to increase or who plan to refinance once rates drop.
Permanent Mortgage Rate Buydowns
A permanent buydown lowers the interest rate for the entire life of the loan. This is achieved by paying discount points upfront, resulting in a consistently lower monthly payment for the full term of the mortgage.
Permanent buydowns are best suited for buyers who plan to stay in their home long-term and want predictable, lower payments over time. The key consideration is the break-even point—how long it takes for the monthly savings to outweigh the upfront cost of the buydown.
Benefits of a Mortgage Rate Buydown
- Lower monthly payments, improving cash flow
- Increased affordability without raising the purchase price
- Seller incentives that can make a listing more attractive
- Payment flexibility during the early years of homeownership
Things to Consider
While mortgage rate buydowns offer meaningful advantages, they are not right for everyone. Buyers should consider how long they plan to own the home, whether they expect to refinance, and how the upfront cost compares to the long-term savings. It’s also important to understand that buydown funds are typically nonrefundable.
Final Thoughts
A mortgage rate buydown can be a powerful tool in today’s market, helping buyers ease into homeownership or secure long-term savings. Working with a knowledgeable lender and real estate professional can help determine whether a temporary or permanent buydown is the right strategy for your financial goals. Let’s connect to get you to a qualified lender today!
