Mortgage Rate Buydowns: How Temporary and Permanent Buydowns Can Lower Your Payment
When you're buying a home, the purchase price isn't the only number that matters.
Your interest rate can have a significant impact on your monthly mortgage payment, which is why some buyers explore mortgage rate buydowns as part of their financing strategy.
But what exactly is a buydown? What's the difference between a temporary and permanent buydown? And when does paying for a lower rate actually make sense?
At TLP Mortgage, we believe the answer depends on your goals, budget, loan program, and how long you expect to keep the mortgage.
Let's break it down.
Quick Answer: What Is a Mortgage Rate Buydown?
A mortgage rate buydown is a financing strategy that can reduce the interest rate or effective payment rate associated with a mortgage.
There are two different strategies you may hear about:
Temporary buydown: Reduces the borrower's payment during the first one or more years of the mortgage through funds placed in a buydown account.
Permanent buydown: Uses discount points paid at closing to obtain a lower interest rate for the life of the loan.
They may sound similar, but they work very differently.
What Is a Temporary Mortgage Buydown?
A temporary buydown reduces the borrower's monthly payment during the initial years of the mortgage.
One common example is a 2-1 temporary buydown.
With a 2-1 buydown, payments are generally calculated using an effective rate that is:
2 percentage points lower during year one
1 percentage point lower during year two
Based on the full note rate beginning in year three
For example, if the mortgage has a 6.5% note rate, the borrower's principal-and-interest payment under a 2-1 temporary buydown would generally be calculated as though the rate were:
Year 1: 4.5%
Year 2: 5.5%
Year 3 and beyond: 6.5%
The actual mortgage note rate in this example remains 6.5%. Funds in the temporary buydown account are used to supplement the reduced borrower payments during the buydown period.
This example is for educational purposes only and does not represent a currently available interest rate or loan offer.
Why Would a Homebuyer Consider a 2-1 Buydown?
The first couple of years of homeownership can come with additional expenses.
You may be paying for:
Moving
Furniture
Appliances
Landscaping
Home improvements
Repairs
Changes in commuting or utility expenses
A temporary buydown can potentially provide a lower initial mortgage payment while you're getting settled into the home.
However, it's important to plan for the full payment that begins after the temporary buydown period ends.
At TLP Mortgage, we want buyers to understand that payment from the beginning—not be surprised by it later.
Who Pays for a Temporary Buydown?
Depending on the loan program and transaction, funds for a temporary buydown may be provided by an eligible interested party, such as a seller or builder, subject to applicable program requirements and contribution limits.
This can make temporary buydowns especially worth discussing when negotiating a home purchase.
Instead of focusing exclusively on reducing the sales price, buyers and their real estate professionals may want to ask:
Would using an eligible seller contribution toward a temporary buydown provide more meaningful short-term payment relief?
The answer depends on the numbers.
That's where your Realtor and TLP Mortgage loan advisor can work together to compare scenarios.
What Is a Permanent Mortgage Rate Buydown?
A permanent buydown works differently.
Instead of temporarily reducing the payment, a borrower may pay discount points at closing in exchange for a lower mortgage interest rate.
One discount point generally equals 1% of the loan amount.
For example:
On a $400,000 mortgage, one point would equal $4,000.
That does not mean one point automatically reduces the interest rate by one percentage point.
The amount a particular number of discount points may reduce an interest rate depends on current market pricing, the loan program, borrower qualifications, and other factors.
That's an important distinction.
Are Mortgage Discount Points Worth It?
Sometimes.
The best way to evaluate discount points is to consider the upfront cost compared with the potential monthly savings.
This is commonly called your break-even point.
For example, suppose paying discount points costs $4,000 and reduces your principal-and-interest payment by $100 per month.
A simple break-even calculation would be:
$4,000 ÷ $100 = 40 months
In this simplified example, it would take approximately 40 months of monthly savings to recover the upfront cost.
If you expect to keep the mortgage well beyond that point, paying discount points may be worth considering.
If you expect to sell or refinance sooner, the math may look very different.
Your actual savings and break-even period will depend on the rates, costs, loan amount, and options available when you apply.
Temporary vs. Permanent Buydown: What's the Difference?
Temporary Buydown
A temporary buydown is designed to provide lower payments during the beginning of the mortgage.
It may make sense for a qualified buyer who:
Wants lower initial payments
Expects income or financial circumstances to change
Has an eligible seller or builder contribution available
Understands and is comfortable with the full future payment
Permanent Buydown
A permanent buydown is designed to secure a lower interest rate for the life of the mortgage by paying discount points upfront.
It may be worth considering for a borrower who:
Plans to keep the mortgage for a longer period
Has funds available for discount points
Wants to reduce the long-term interest rate
Can reach a reasonable break-even point based on the cost and monthly savings
Neither strategy is automatically better.
The right answer depends on your specific numbers.
Can a Seller Pay for a Mortgage Rate Buydown?
Potentially, yes.
Seller contributions may be permitted to pay certain eligible closing costs, including costs associated with qualifying temporary or permanent buydown structures, depending on the mortgage program and applicable limits.
This is where communication between your loan advisor and real estate professional becomes especially important.
A seller may be willing to negotiate a concession, but you still need to determine the best way to use it.
For one buyer, reducing the sales price may make the most sense.
For another, using eligible funds toward closing costs could be more valuable.
And for another, a rate buydown could potentially have a greater impact on the monthly payment.
Run the numbers before deciding.
Should I Buy a Home Now and Refinance Later?
You'll sometimes hear:
“Buy now and refinance when rates come down.”
Refinancing may be an option in the future, but it should never be treated as a guarantee.
Interest rates are unpredictable. Property values can change. Your financial circumstances can change. Refinancing also involves qualification and may involve closing costs.
A home purchase should make financial sense based on the mortgage you're obtaining today, not solely because you expect to refinance later.
If rates eventually improve enough for refinancing to make sense, that's an opportunity you can evaluate at that time.
Frequently Asked Questions About Mortgage Rate Buydowns
Does a 2-1 buydown permanently lower my mortgage rate?
No. A 2-1 buydown temporarily reduces the borrower's payment during the first two years. The mortgage's note rate itself is not permanently reduced by the temporary buydown.
What happens after a 2-1 buydown ends?
After the temporary buydown period, the borrower is responsible for the full payment based on the mortgage's note rate and loan terms.
Does one discount point lower my rate by 1%?
No. One discount point generally costs 1% of the loan amount, but that does not mean it lowers the interest rate by one percentage point. Rate reductions associated with discount points vary.
Can a seller pay for discount points?
Seller contributions may be used toward certain eligible costs subject to the mortgage program, transaction, and applicable contribution limits.
Is it better to lower the home price or buy down the interest rate?
It depends.
A lower sales price and a lower interest rate affect your finances differently. Ask your TLP Mortgage loan advisor to compare the monthly payment, upfront costs, cash to close, and potential long-term costs of each option.
Can I refinance after using a temporary buydown?
Potentially, if you qualify for refinancing in the future. However, borrowers should not enter into a mortgage assuming that refinancing will be available or financially beneficial later.
Don't Guess, Compare the Scenarios
Mortgage strategy shouldn't be based on headlines or assumptions about where interest rates are going.
It should be based on your numbers.
At TLP Mortgage, we can compare different financing scenarios so you can see how changes in the interest rate, discount points, seller contributions, closing costs, and loan program may affect your:
Monthly payment
Cash needed at closing
Break-even point
Short-term costs
Long-term borrowing costs
Sometimes the lowest advertised rate isn't the best financial option.
And sometimes paying more upfront to lower the rate doesn't make sense for how long you plan to own the home or keep the mortgage.
Our goal is to help you understand the difference so you can make an informed decision.
If you're buying a home in San Antonio or elsewhere in Texas, talk with a TLP mortgage loan advisor about whether a temporary or permanent mortgage rate buydown could make sense for your homebuying strategy.
Loan programs, interest rates, discount points, lender credits, temporary buydowns, seller contributions, terms, and eligibility requirements are subject to change and borrower qualification. Temporary buydown availability and funding requirements vary by loan program. Examples are hypothetical and provided for educational purposes only. This is not a commitment to lend.
