A buydown is a way to temporarily reduce your interest rate when you purchase a home. With a buydown, you pay an upfront fee in return for a lower rate during the first years of a mortgage.
Buydowns can make your monthly payments more affordable by reducing your interest payments. Homeowners often pay for buydowns to help close the sale as part of their seller concessions. Lenders and home builders can offer them to homebuyers too. Buydowns are more common when mortgage rates are high.
How do mortgage buydowns work?
Mortgage buydowns are typically good for two or three years, and the interest rate usually changes each year. Common types of mortgage buydowns include:
- 3-2-1 mortgage buydowns. These buydowns last for three years. In the first year, your interest rate is reduced by 3%. In the second year, it’s reduced by 2%. In the third year, it’s reduced by 1%.
- 2-1 mortgage buydowns. These buydowns last for two years. In the first year, your interest rate is reduced by 2% and in 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.
Once the buydown expires, your interest rate will return to the loan’s original rate. For example, if your mortgage interest rate is 6% and you have a 2-1 buydown, then your rate will be 4% in the first year, 5% in the second year, and 6% in the third year.
To qualify for a buydown, you need to be approved for the mortgage at the full interest rate. This means, in the example above, you would need to be approved for a loan with a 6% interest rate.
How much can buydowns lower mortgage payments?
Buydowns can significantly lower your monthly payments for a short period of time. Take a look at this sample payment for a $300,000 mortgage that has a 6% interest rate and a 2-1 buydown.
| Year | Interest Rate | Principal & Interest | Taxes & Insurance | PMI | Total Payment |
|---|---|---|---|---|---|
| 1 | 4% | $1,432 | $358 | $195 | $1,986 |
| 2 | 5% | $1,610 | $358 | $195 | $2,164 |
| 3 | 6% | $1,799 | $358 | $195 | $2,352 |
This example assumes the buyer purchased the home for $350,000 with a $50,000 down payment and a 30 year fixed rate conventional mortgage. Your payments might vary from this example. To estimate your payments, check out our mortgage payment calculator.
How much do mortgage buydowns cost?
The cost of mortgage buydowns is based on the amount of money you are saving each month on interest payments. For example, a 1-1 buydown that saves you $100 a month in interest payments for two years might cost the seller $2,400.
Do mortgage buydowns save you money?
Buydowns can save you money when the seller pays the costs as part of the sales agreement. When you are thinking about paying for a buydown yourself, consult a financial professional to decide if the costs make sense for you.
