What Is Mortgage Rate Buydown?
A mortgage rate buydown is an upfront payment that lowers a borrower's interest rate, either permanently through discount points or temporarily for the first years, as in a 2-1 buydown. It is often paid by a seller or builder, and matters because it lowers payments but only saves money if its cost is recovered.
Mortgage Rate Buydown in plain English
A buydown is money paid upfront to lower your mortgage rate. A permanent buydown uses discount points to cut the rate for the whole loan; a temporary buydown, such as a 2-1, subsidizes lower payments only in the first year or two.
Sellers and builders often pay for buydowns as an incentive, so the buyer gets lower payments without bringing more cash.
Advanced explanation
A permanent buydown prices discount points into the note rate for the life of the loan; its value depends on the rate reduction per point and how long the loan is kept. A temporary buydown funds a subsidy account that covers the payment difference during the buydown years while the note rate is unchanged, so the borrower qualifies at the note rate. Seller- and builder-paid buydowns are interested-party contributions subject to program limits.
Formula
Temporary Buydown Cost = Σ (Note-Rate Payment − Bought-Down Payment) × 12- Note-Rate Payment
- The monthly principal and interest at the loan's full rate.
- Bought-Down Payment
- The monthly payment at the reduced rate for that year of the buydown.
Related forms: Permanent Buydown Break-Even (months) = Cost of Points ÷ Monthly Payment Savings.
Worked example
Temporary 2-1 buydown versus one discount point
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $400,000 at a 7.00% note rate, 30 years
- Permanent option
- 1 point lowers the rate 0.25 percentage point (lender pricing varies)
| Step | Calculation | Result |
|---|---|---|
| 1. Payment at the note rate | $400,000 at 7.00% | $2,661.21 |
| 2. Year 1 payment (5.00%) | $400,000 at 5.00% | $2,147.29 |
| 3. Year 2 payment (6.00%) | $400,000 at 6.00% | $2,398.20 |
| 4. Cost of the 2-1 buydown (the subsidy) | ($513.92 + $263.01) × 12 | $9,323 |
| 5. One point instead: cost and savings | $4,000 for $66.82 a month | break-even in 60 months |
2-1 buydown cost: $9,323. A 2-1 buydown costs about $9,323 and saves money only in the first two years. One point costs $4,000 and saves about $67 a month for as long as you keep the loan.
What this calculation leaves out
- Lenders qualify you at the full note rate, not the bought-down rate.
- Rate-per-point pricing is set by each lender daily; 0.25 point per point is a ballpark, not a quote.
- If the loan is refinanced during the buydown period, how unused subsidy is handled depends on the buydown agreement.
Try it: Mortgage Rate Buydown with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
Builder incentives compared: the same dollars, five ways
A builder's incentive can cut the price, pay closing costs, buy down the rate or fund upgrades. Each changes cash to close, the payment and the long-term cost differently.
- Lowest 5-year cost
- Price reduction
- $573,772
- Least cash at closing
- Closing-cost credit
- $44,500
- Lowest first-year payment
- Temporary 2-1 buydown
- $2,150 a month
| Option | Cash to close | Payment year 1 | Payment year 3 | 5-year cost | Unused |
|---|---|---|---|---|---|
| Price reduction | $55,000 | $2,575 | $2,575 | $573,772 | — |
| Closing-cost credit | $44,500 | $2,665 | $2,665 | $581,369 | $3,000 |
| Temporary 2-1 buydown | $50,835 | $2,150 | $2,665 | $578,369 | — |
| Permanent buydown (points) | $56,500 | $2,418 | $2,418 | $574,532 | — |
| Upgrade allowance | $56,500 | $2,665 | $2,665 | $593,369 | — |
- Price reduction: Lowers the loan, the payment and usually the property tax for as long as you own the home. Not an interested-party contribution, so no concession limit applies.
- Closing-cost credit (financing concession): Lowers cash to close dollar for dollar, up to your actual closing costs and prepaids. Cannot fund the down payment; any excess is usually lost.
- Temporary 2-1 buydown (financing concession): The buydown costs $9,335; the rest of the incentive goes to closing costs. You qualify at the full note rate, and the payment rises in years 2 and 3.
- Permanent buydown (points) (financing concession): About 3.75 points, lowering the rate to roughly 6.064% (lender pricing varies). Saves every month for the life of the loan - unless you refinance or sell early.
- Upgrade allowance: Worth the full amount only if you would have bought those upgrades anyway. Upgrades may add less resale value than they cost; the appraisal must still support the price.
Eligibility: you qualify at the full note rate with a temporary buydown; credits cannot fund the down payment.
Formula
5-year cost = Cash to close + Σ payments (months 1–60) + Balance after 60 monthsAssumptions
- Concession limit at this LTV: 6% of the price ($26,700), Fannie Mae Selling Guide B3-4.1-02, principal residence.
- 30-year fixed loan; taxes, insurance and mortgage insurance left out.
- Point pricing varies by lender; get the builder's lender quote in writing and compare it with an outside lender.
- Upgrades are counted at zero cash value: they help only if you wanted them.
Why it matters
Buydowns are among the most common seller and builder incentives, and the right type depends on how long you will keep the loan and whether you can afford the full payment later.
The same dollars buy very different results. On a $400,000 loan at 7%, about $9,300 funds a 2-1 buydown that saves money for two years, while $4,000 of points saves about $67 a month for as long as the loan lasts.
What it means for you
Who pays?
The buyer, seller or builder. Seller- and builder-paid buydowns count toward interested-party contribution limits.
When is it paid?
At closing. A temporary buydown is deposited into a subsidy account that tops up your payments during the buydown years.
What happens if something goes wrong?
If you refinance or sell during a temporary buydown, what happens to any unused subsidy depends on the buydown agreement - read it before closing.
Common mistakes
- Choosing a temporary buydown without being able to afford the full payment in year three.
- Paying for a permanent buydown and then refinancing before the break-even point.
- Assuming buydown pricing is the same everywhere - each lender prices points differently.
Mortgage Rate Buydown: frequently asked questions
Is a temporary or permanent buydown better?
A permanent buydown is usually better if you expect to keep the loan past its break-even point; a temporary buydown helps if you need lower payments early or expect to refinance within a few years.
Do I qualify at the bought-down rate?
Not for a temporary buydown on a Fannie Mae loan: lenders must qualify you at the full note rate. A permanent buydown lowers the note rate itself, so you qualify at the lower rate.
Who pays for a buydown?
Anyone can - the buyer, the seller or a builder. When the seller or builder pays, it counts as an interested-party contribution and is subject to the loan program's limit.
How long can a temporary buydown last?
Under Fannie Mae's rules, up to three years, with the rate rising by no more than one percentage point a year.
Go deeper
Where it fits
- Buying a home, Offer & Negotiation: before this, Seller Concession; next, Backup Offer.
More Financing Terms
Recommended next step
Compare a 2-1 buydown with points over the years you expect to keep the loan.
Temporary vs permanent buydown calculator →Apply it to a specific property: Builder incentive comparison.
Sources and review
- Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns, Fannie Mae. Supports: Temporary buydowns: up to 3 years, rate rising no more than 1% a year, qualification at the note rate.
- How should I use lender credits and points (also called discount points)?, Consumer Financial Protection Bureau. Supports: Discount points lower the rate in exchange for an upfront payment; whether they pay off depends on how long you keep the loan.
- Selling Guide B3-4.1-02, Interested Party Contributions (IPCs), Fannie Mae. Supports: Seller- and builder-paid financing concessions are interested-party contributions subject to limits.
Where this applies: United States. Federal disclosure rules apply nationwide; loan-program limits are set by each program (Fannie Mae shown) and individual lenders may be stricter.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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