Mortgage Buydown: Types, Cost, and When It Makes Sense

How Buying Down Your Mortgage Rate Works

If you’ve been paying attention to the housing market recently, you know that buying a home is a major expense—and that’s before you factor in the interest rate. A high interest rate can increase your monthly mortgage payment and stretch your budget. But there’s a strategy you can use to pay more upfront and secure a lower interest rate, potentially making homeownership more affordable.

Let’s discuss what mortgage buydowns are, how they work, and how to tell if it’s an option you should explore.

What Is a Mortgage Buydown?

A mortgage interest rate buydown is a strategy to get a lower interest rate when you purchase a home. Buydowns can make monthly payments more affordable by reducing interest payments, so they’re usually more common when mortgage rates are high.

Interest rate buydowns can be temporary or permanent. They’re most commonly used for primary residences and are available on several loan types, though rules and limits vary by program and lender.

Buydowns aren’t typically used to refinance loans or investment properties.

How Does Buying Down an Interest Rate Work?

In a mortgage buydown, an upfront cost is paid at closing rather than the seller lowering the home's purchase price. With temporary buydowns, the upfront funds are often placed into an escrow account and applied to your monthly payments. The goal of mortgage buydowns is to make payments more affordable, which can be particularly helpful during the early years of the home loan.

Types of Mortgage Buydowns

There are two main types of mortgage buydowns: temporary and permanent. Both options involve an upfront cost. In temporary buydowns, the loan’s original interest rate remains unchanged, and payments gradually increase until they reach the full amount. Permanent buydowns reduce the interest rate for the life of the loan.

Temporary Buydowns

With a temporary buydown, an upfront fee is paid in return for a lower interest rate during the first years of a mortgage. Temporary mortgage buydowns are typically good for two or three years, with the interest rate changing each year.

• 3-2-1 mortgage buydowns: These buydowns last for three years. During the first year, your interest rate is reduced by 3%. During the second year, it’s reduced by 2%. During the third year, it’s reduced by 1%.
• 2-1 mortgage buydowns: These buydowns last for two years. During the first year, your interest rate is reduced by 2%, and during the second year, it’s reduced by 1%.
• 1-1 mortgage buydowns: These buydowns reduce the borrower’s interest rate by 1% for the first two years of the loan.

Mortgage 2-1 Buydown Example

Hypothetical example for illustrative purposes only; not a commitment to lend or an offer of currently available terms. Rates, payments, terms, and savings shown are hypothetical figures selected solely to illustrate how mortgage costs and terms can vary, and do not reflect an actual loan offer.

Buydowns can significantly lower your monthly payments for a short period. Let’s say you took out a $300,000 mortgage with a 6% interest rate and a 2-1 buydown on a 30-year fixed-rate, conventional mortgage. This is what your monthly principle and interest payments would look like during the first two years and in the third, when the buydown period ends:

To qualify for a buydown, you need to be approved for the mortgage at the full interest rate.

Permanent Buydowns

Permanent buydowns are possible by purchasing mortgage discount points to lower the interest rate for the life of your loan, not just during a buydown period.

Discount points typically cost 1% of the loan amount per point and generally lower the interest rate by 0.25%. In this scenario, you’d pay mortgage points to your lender in exchange for a lower interest rate, almost like you’re prepaying interest  for a lower monthly  payment.