Two kinds of buydown
In a 2-1 buydown the rate is 2 points lower in year one and 1 point lower in year two. A 1-0 buydown lowers it by 1 point for one year, and a 3-2-1 steps down over three. The cost of the subsidy is calculated up front and set aside in an account at closing. Each month the account tops up the difference between your reduced payment and the full note-rate payment. Your loan itself is written at the full note rate.
A permanent buydown is simply paying points. Because you are paying cash for a lower rate, it behaves like any other point: the savings take years to repay the cost. Our guide to mortgage points covers the math.
An example with real numbers
A $400,000, 30-year fixed loan with a 7.00% note rate. The 2-1 buydown payments are calculated at 5.00% in year one and 6.00% in year two.
| Year 1 | Year 2 | Year 3 and after | |
|---|---|---|---|
| No buydown | $2,661 | $2,661 | $2,661 |
| 2-1 buydown | $2,147 | $2,398 | $2,661 |
The 2-1 buydown costs $9,323: ($2,661 − $2,147) × 12 plus ($2,661 − $2,398) × 12. Spend the same $9,323 on points instead and, at an assumed 0.25 rate reduction per point, you would buy 2.33 points and a rate of about 6.42%, for a payment of $2,507 every month.
Now compare total cost through each year: all payments plus the loan balance you would still owe. (The seller pays for the buydown in this example. Lower is better.)
| If you keep the loan | No buydown | 2-1 buydown | Permanent |
|---|---|---|---|
| 1 year | $427,871 | $421,704 | $425,537 |
| 3 years | $482,711 | $473,388 | $475,691 |
| 5 years | $536,199 | $526,876 | $524,479 |
| 10 years | $662,595 | $653,272 | $639,185 |
Temporary vs permanent buydown
A 2-1, 1-0 or 3-2-1 buydown against a permanent rate cut bought with the same dollars.
The calculator loads as you scroll. Open the full buydown calculator if you prefer.
Assumptions
- The temporary subsidy equals the sum of the payment differences; the permanent option spends the same dollars on points.
- The reduction per point is your input.
- You still qualify at the full note rate.
Which one wins, and when
In this example the 2-1 buydown is cheaper for the first four years, and the permanent buydown has saved more from about month 48 on. Change the assumed rate per point, though, and the crossover moves: a lender that cuts the rate by less per point pushes the break-even later and favors the temporary option; a more generous one does the opposite.
- A temporary buydown fits when you expect your income to rise, you want cash-flow relief while you settle in, or you plan to sell or refinance within a few years.
- A permanent buydown fits when you plan to stay a long time and want a lower payment you can count on.
- If you plan to refinance when rates drop, a permanent rate cut is worth less, because the points are spent once and the new loan replaces the old rate.
Risks of a temporary buydown
- Payment shock. When the buydown ends, your payment steps up to the full amount. In the example it rises $251 a month in year two and another $263 in year three, $514 a month above year one. Be sure the full payment fits your budget.
- You still qualify at the note rate. A buydown does not let you buy more house; the lender uses the full payment to size your loan.
- Hidden price. A seller or builder who pays for a buydown may have priced the cost into the home. Ask what the price would be without it.
- Early exit. Unused subsidy funds may not be refunded if you sell or refinance early. Ask your lender.
- Rates are not guaranteed to fall. A plan to refinance before the buydown ends only works if rates, your credit and home value allow it.
Before you count on a refinance, work through the break-even in buy now, refinance later.
Buydown, price cut or closing credit?
If a seller offers money, you may be able to choose where it goes: closing costs, a buydown or a lower price. The seller credit vs price reduction calculator compares them with your own numbers. Builders often pair rate buydowns with specific lenders; see builder incentives and compare the builder’s lender with an outside Loan Estimate. Concession limits vary by loan program, so confirm them before you negotiate.
Seller credit vs price reduction
The same dollars as a closing credit, a lower price, or a rate buydown: what each does to your cash and payment.
The calculator loads as you scroll. Open the full comparison if you prefer.
Assumptions
- Net cost assumes the home later sells at the original price and ignores selling costs.
- A credit cannot exceed your closing costs; lenders cap seller concessions by loan type.
- The rate reduction per point is your input.
Sources and further reading
Written by the Reaixo editorial team. Last reviewed . Educational information, not financial, legal or tax advice.