What is a Mortgage Rate Buydown, and Should You Consider One?
What is a Mortgage Rate Buydown, and Should You Consider One?
Buying a home is one of the biggest financial decisions you’ll make, and the interest rate on your mortgage can significantly impact your monthly payment. In a higher-rate market, one strategy that can make homeownership more affordable is a mortgage rate buydown. But what exactly is a buydown, and is it a good fit for you? Let’s take a closer look.
What is a Mortgage Rate Buydown?
A mortgage rate buydown is a financing option that allows you to lower your interest rate—either temporarily or for the entire loan term—by paying an upfront fee at closing. This fee is calculated in discount points (where one point equals 1% of the loan amount) and can be covered by you, the seller, or even the lender as part of a negotiated deal.
Types of Mortgage Rate Buydowns
There are two primary types of buydowns:
1. Temporary Buydown
• Your mortgage rate is reduced for the first few years, making your initial payments lower.
• The rate then adjusts back to the original rate for the rest of the loan term.
Common temporary buydown structures include:
• 3-2-1 Buydown: Your rate is reduced by 3% in the first year, 2% in the second, and 1% in the third before returning to the standard rate.
• 2-1 Buydown: Your rate is reduced by 2% in the first year and 1% in the second, before reverting to the original rate.
These are often paid by sellers or builders to attract buyers.
2. Permanent Buydown
• You pay discount points upfront to reduce your interest rate for the entire loan term.
• Typically, one discount point lowers your rate by about 0.25%, though this varies by lender.
How Much Can You Save?
Your savings will depend on the loan amount, interest rate, and how many points you purchase. Here’s an example:
• Loan Amount: $500,000
• Standard Rate: 7.0%
• With Buydown: 6.5% (after buying two discount points for $10,000)
• Monthly Savings: ~$167 per month
• Break-even Point: ~5 years to recoup the upfront cost
If you’re planning to stay in the home long enough to surpass the break-even point, a permanent buydown could save you thousands over the life of the loan.
Who Should Consider a Mortgage Rate Buydown?
A buydown might be a good idea if you:
✅ Plan to stay in the home for several years and want to lock in a lower rate.
✅ Expect to refinance or increase income before the buydown period ends (for temporary buydowns).
✅ Are buying from a motivated seller or builder willing to cover the cost.
✅ Want to lower initial payments to improve affordability in the short term.
A buydown might NOT be the best option if you:
❌ Plan to sell or refinance too soon, before breaking even on the cost.
❌ Could struggle with higher payments later when a temporary buydown expires.
❌ Have better ways to use your cash, such as a larger down payment or emergency savings.
Final Thoughts: Is a Buydown Right for You?
A mortgage rate buydown can be an excellent way to reduce your monthly payment, especially if a seller or builder is covering the cost. But if you’re paying for it yourself, make sure to calculate the break-even point and consider whether it aligns with your long-term plans.
If you’re thinking about buying a home and want to explore your financing options, let’s talk!
Joe Sheldon, Real Estate Broker
Designed Realty
Phone: (206) 751-2223
Email: [email protected]
