Homebuyers

The Rise of Mortgage Rate Buydowns: How They Can Save Buyers Thousands

Many would-be homebuyers are putting their plans on hold due to high home prices and elevated mortgage interest rates.

That’s resulted in some builders, and even the occasional seller, that are so eager to get to the closing table that they are buying down mortgage rates for home shoppers. These mortgage rate buydowns lower interest rates for the first few years—or the entirety—of the buyer’s loan. 

“Mortgage rate buydowns are a tool homebuilders can offer consumers to help with the monthly housing cost,” said Ali Wolfe, chief economist at Zonda.

And they’re being used more than ever. A recent Goldman Sachs report found that nearly 40% of new-home sales now include a buydown, up sharply from pre-pandemic levels.

But what are they, how do they work, and are they worth it? Here’s what to know.

How a mortgage rate buydown works

A mortgage rate buydown is exactly what it sounds like: a builder or home seller typically pays upfront to reduce the buyer’s mortgage interest rate. These buydowns lower the buyer’s interest rate during the early years of the loan or for the entire duration of the mortgage. This can ease the initial sting of high monthly payments.

Some lenders also offer buydown loans that lower the payment rate during the first few years of the loan.

“Buydowns can come in two forms,” said Wolfe. [This can be] a fixed mortgage rate for the life of the loan or a temporary buydown where the loan has a lower interest rate for the first one to five years before resetting at a final fixed rate.”

A temporary buydown lowers the rate for the first few years, say, two percentage points the first year, one point the second, before settling into the original fixed rate.

Here’s an example:

• Let’s say your permanent rate is 6.5%.
• With a 2-1 buydown, you’d pay 4.5% the first year, 5.5% the second, and 6.5% thereafter.
• The builder or home seller covers the cost of the reduced interest through a lump-sum payment at closing.

This strategy may cut quite a bit of money from your monthly mortgage payment during the early years of your loan. That money that can be used to cover moving expenses, new furnishings, or simply to build up an emergency fund.

Builders are also offering 3-2-1 buydowns, which phase in the full interest rate over three years. The more aggressive the buydown, the more it costs the builder.

“The mortgage is subsidized by the seller to help make the payment more attractive for a potential buyer,” said Anthony Ramirez, senior loan officer at New American Funding based in San Diego, Calif.

Why builders love mortgage rate buydowns right now

The surge in buydown usage is a sales tactic. It allows builders to address today’s affordability challenges while preserving base prices on new construction.  

So, instead of cutting the price of a $600,000 home by $20,000, a builder might spend $15,000 on a buydown. This can lower the buyer’s payment in the short term without undermining overall neighborhood comps (and infuriating recent buyers who may have paid more) or endangering future resale values.

Wolfe points out that today’s buydown offers shouldn’t be confused with some of the riskier loans that contributed to the 2008 financial crisis. These were the mortgages that started out with lower payments and then ballooned over time, forcing some homeowners into foreclosure.

“Before people start drawing parallels to the unhealthy lending seen in the mid-2000s, it’s important to note that there is stricter regulation in place today,” said Wolfe. “Notably, consumers have to qualify today for the final fixed rate.”

In other words, the risk isn’t buried in the fine print. Buyers must still be able to make the full mortgage payment once the rate goes up—even if they’re paying less in the beginning.

When a mortgage rate buydown makes sense for homebuyers

For buyers with a clear game plan, a temporary buydown can be a smart bridge to a more affordable future.

“It’s a method to help reduce payment shock,” said Ramirez. That shock is real for buyers making the leap from renting or from a previous mortgage with a lower rate.

Buydowns also make sense if your income is likely to rise soon.

“If there is a plan in place where future earnings are known to increase—i.e. completing higher education with the hopes of higher future income to keep pace with the rising mortgage payment,” Ramirez said, a buydown can help you ease into that higher payment gradually.

There’s also the chance you’ll refinance before hitting the full rate. If rates fall by then, you may be able to save money on your monthly payment.

What to ask if you are a homebuyer considering a mortgage rate buydown

While a buydown can be a genuine win, homebuyers need to understand exactly what’s being offered and what strings might be attached.

Before signing, ask these important questions:

• Is this a temporary or permanent mortgage rate buydown?
• Who’s paying for it—the builder or seller, the lender, or you?
• What happens when the rate resets?
• Are there other trade-offs (like reduced closing costs or a higher sale price)?

Also important: compare the buydown scenario to current market rates and your own plans.

If you expect to refinance within a few years, or move altogether, you might benefit more from a temporary buydown than from locking in a slightly lower rate over 30 years.

Keep in mind: buydowns are most effective when rates are expected to fall eventually, making refinancing into a lower payment a valid option. If rates climb, and you haven’t locked in a fixed rate, you could end up paying more in the long run.

“For consumers looking to buy a home today, a builder-paid mortgage rate buydown is a great option to help with today’s high mortgage interest rates,” Wolfe said.

Anthony Ramirez NMLS# 249819