What is a mortgage buydown?
A mortgage buydown is a way of reducing your mortgage interest rate. In most cases, a lump sum is paid at closing. This can be paid by the homebuyer, seller, homebuilder, or lender. This payment “buys down” the rate and lowers your monthly mortgage payment.
Buydowns are popular when interest rates are high. They can make buying a home more affordable early in your loan.
There are two main types of mortgage rate buydowns. Temporary buydowns cut your rates for the first years of the loan, which is what the calculator above shows. Permanent buydowns lower your rate for the full loan term. You do this by paying discount points at closing.
Understanding temporary vs. permanent mortgage rate buydowns
A temporary buydown reduces your mortgage interest rate for the first one, two, or three years of the loan. The most common structures are the 2-1 buydown and the 3-2-1 buydown.
A 2-1 buydown reduces your rate by two percentage points in the first year and one percentage point in the second year before settling in at the full rate in year three and beyond.
A 3-2-1 buydown reduces the rate by three points in year one, two points in year two, and one point in year three.
The cost of a temporary buydown is calculated based on the difference between the actual interest rate of your loan and the reduced rate over the buydown period. The lender or seller will typically pay the difference upfront as a lump sum that goes into an escrow account. Each month, the lender draws from that account to make up the difference between your subsidized lower payment and the full payment amount.
Your actual loan remains a fixed-rate mortgage. The buydown simply offsets a portion of the interest on your behalf for the specified period.
A permanent buydown, often called paying "mortgage points" or "discount points," reduces your interest rate for the life of the loan.
Each point typically costs 1% of the loan amount and reduces your rate by a fraction of a percentage point, usually around a quarter percentage point. However, the exact reduction varies by lender and market conditions. Unlike a temporary buydown, which delays the full rate, a permanent buydown lowers the total cost of the home loan permanently.
How to use the buydown calculator
To use the buydown calculator, begin by entering your home price and down payment to establish your base loan amount. Then add your note rate, which is the interest rate stated on your mortgage before any buydown is applied, along with the expected term length of your loan.
Next, select your buydown type. You can choose from common temporary structures such as a 1-0, 2-1, 1-1-1, or 3-2-1 buydown, or enter a custom rate reduction to model a specific scenario.
The calculator will display your reduced monthly payment for each year of the buydown period alongside your standard payment once the buydown expires. This will help you understand what your monthly mortgage payments will look like in the future.
You can also factor in property taxes, homeowner’s insurance, and homeowner association (HOA) dues for a more complete picture of your total monthly housing costs.
Once you click Calculate, you’ll see a side-by-side comparison of your payments during and after the buydown period, along with an estimated total cost of the buydown. This helps you weigh the upfront expense against the monthly savings and decide whether a buydown is right for your situation.
Types of mortgage buydowns
A temporary mortgage buydown is a lump sum that will need to be paid for by the builder or seller to temporarily reduce the interest rate of the mortgage for a specified time frame. Since the buydown lowers your interest rate, it will effectively reduce your overall monthly mortgage payment for the first few years of your mortgage. Temporary buydowns are covered by the lender, seller, or builder.
2-1 Buydown
The 2-1 buydown is the most widely used temporary buydown. In the first year, your interest rate is reduced by two percentage points below your note rate. In the second year, it’s reduced by one percentage point. Beginning in year three, your rate returns to what it was when you took out your loan for the remainder of your mortgage.
For example, if your rate is 7%, you’d pay at an effective rate of 5% in year one and 6% in year two before settling at 7% from year three onward. The lower initial payments can give you breathing room to build savings, pay off other debts, and settle into homeownership before the full payment takes effect.
Sellers and homebuilders frequently offer 2-1 buydowns as a seller concession to attract buyers, particularly in markets where homes are sitting longer. Since the buydown is funded upfront at closing, it doesn’t change the actual loan terms.
If interest rates drop during the buydown period, you may also be able to refinance into a lower permanent rate before the buydown expires. Unused buydown funds will be applied to the loan balance.
3-2-1 Buydown
The 3-2-1 buydown offers even greater savings at the start of the loan term by reducing your rate by three percentage points in the first year, two points in the second year, and one point in the third year. From year four forward, your rate returns to the full interest rate.
The larger upfront discount can lower monthly payments in year one. It gives buyers time to adjust their budget. The rate then ticks up over three years. For buyers purchasing a new build who expect their income to grow, a 3-2-1 buydown may fit in well with their plans.
1-1-1 Buydown
The 1-1-1 buydown lowers your mortgage interest rate by one percentage point for each of the first three years of your loan. For example, if your locked-in rate is 7%, you would have a 6% rate in year one, 6% in year two, and 6% in year three. Your rate then settles at the original 7% for the remainder of the loan.
Often paid for by the seller, builder, or lender, a 1-1-1 buydown gives you breathing room in the early years of homeownership. This may make your monthly payments more affordable while you get settled into your new home.
1-0 Buydown
The 1-0 buydown is the simplest temporary buydown structure, reducing your interest rate by one percentage point for the first year of the loan. From year two onward, your rate returns to the full interest rate.
This structure is the least expensive of the common buydown options and is a practical choice when the seller or builder wants to offer a meaningful incentive without committing to a larger concession.
It can also be a useful tool for borrowers who may want to refinance within a year or two if mortgage rates improve.
Permanent Buydown (Discount Points)
A permanent buydown involves paying mortgage discount points at closing to reduce your interest rate for the life of the loan.
One discount point typically costs 1% of the loan amount. For a $400,000 loan, one point costs $4,000. Depending on current market conditions, paying one point might reduce your interest rate by approximately a quarter of a percentage point, though the exact amount may depend on factors like market conditions.
Unlike a temporary buydown, a permanent buydown lowers your rate for the duration of your loan. It reduces both your monthly payment and the total interest you pay over the life of the loan.
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