- With an interest rate buydown, you pay up front to lower your mortgage rate.
- Buydowns can be temporary or permanent, and they can be paid for by the seller, buyer, builder, or lender.
- Buying down your rate can be worth it if you stay in the home long enough to break even on your costs.
High mortgage rates can make it hard to afford to buy a home. An interest rate buydown, though, could help.
Buydowns allow buyers or other involved parties to pay for a lower interest rate. This can reduce the amount of interest the buyer pays, both monthly and over the long haul.
Types of mortgage rate buydowns
An interest rate buydown is where one party — the buyer, lender, homebuilder, or seller — agrees to pay an upfront fee to lower the buyer's interest rate.
Temporary vs. permanent buydowns
Buydowns can be permanent for the life of the loan or temporary, lasting only the first few years.
The choice between temporary vs. permanent rate buydown options depends on your budget, what the lender or seller is offering, the market, and other factors.
A popular type of rate buydown is a 2-1 buydown. This lowers interest by two percentage points during the first year you have the loan and one point during the second year. After that, interest returns to the original rate.
"Homebuyers can have a lower payment for two years and ideally be able to refinance right as rates are coming down in the future," says Steve Hill, lead mortgage broker for SBC Lending.
Point-based buydowns
Permanent buydowns are often done by buyers, agreeing to pay their mortgage lender money upfront in exchange for a lower rate.
This practice is often referred to as buying mortgage points, as you'll pay one "point" and, in return, get an incrementally lower interest rate. The more points you buy, the lower your rate goes. (Though lenders may put a cap on how many points you can purchase).
How to buy down your interest rate
How mortgage buydowns work depends on the type you're using. See below for details on buyer-paid buydowns and those paid for by other parties.
The process of buying down a rate
Let your lender know you're interested in lowering your rate. They can help you sort through your options, whether you're doing a temporary or permanent buydown.
If you're doing a permanent buydown, you'll buy mortgage points. Each point costs 1% of the loan amount and usually lowers the interest rate by a quarter of a percentage point. You'll hand these fees over along with your other closing costs and your down payment at the closing table.
Other parties can purchase buydowns on the buyer's behalf. These are usually a tool used to secure a buyer in a competitive market or to attract borrowers when rates are high. Sellers can use buydowns to make a home purchase more attractive without accepting a lower price or making other concessions.
Homebuilders may also offer buydowns to encourage people to buy their new construction homes.
How much does it cost to buy down your interest rate?
If a lender or seller offers to pay for your buydown, that's a win-win, even if it's temporary (as long as you can handle the higher payment later on).
If you hope to buy points yourself, though, you'll need to do some math. How much it costs depends on how much you want to lower your rate. Remember that a discount point typically costs 1% of the loan amount and equals a quarter-point reduction of your rate.
For example, say you're borrowing $350,000 at a 7% rate and you want to lower your rate by half a percentage point. You'll need to purchase two discount points. One point on a $350,000 loan equals $3,500. For two points, you'll pay $7,000 at closing to lower your rate to 6.50%.
Because this is a sizable upfront cost, you'll want to calculate the break-even point to make sure it's worth it. We'll go into this math more later on.
Benefits of mortgage rate buydowns
The benefits of buying down a mortgage rate primarily pertain to affordability.
Lower monthly payments
First, lower rates mean buyers get a lower monthly mortgage payment. This could help them afford a home more easily and without stretching their budget.
Potential long-term interest savings
It can also save you significantly on long-term interest costs.
See an example of calculating savings from mortgage buydowns below (this one is a permanent rate buydown that takes the rate from 7% to 6% on a $400,000 loan):
| Original Interest Rate | After Buydown | |
| Interest Rate | 7% | 6% |
| Loan Amount | $400,000 | $400,000 |
| Monthly Payment | $2,661 | $2,398 |
| Monthly Savings | N/A | $263 |
| Total Interest Paid Over 30 Years | $558,035 | $463,352 |
| Total Interest Savings | N/A | $94,683 |
Considerations before buying down your interest rate
Analyzing the break-even point and your long-term homeownership plans
Think of this as a cost analysis of mortgage rate buydowns. To calculate your break-even point, take the total cost of the points and divide it by the monthly savings you'd get from it. This will tell you how many months it will take to break even.
From here, you'll need a good idea of how long you plan to be in the home. If you think you'll still be there to reach the break-even point, then the buydown is probably a good idea. If you're not sure, the move could be risky.
Current and future financial situation
Keep in mind that if you're getting a temporary buydown, you'll need to be confident in your future finances. Once your rate buydown expires, your rate and payment will revert to the original ones quoted by your lender. You'll want to be sure you have the cash to cover this increased payment when the time comes, or you could risk foreclosure.
Getting a lender-paid or seller-paid mortgage rate buydown
Buying down your rate yourself is pretty simple, but if you want someone else to cover the costs, you'll need to work for it. Use the following strategies for negotiating rate buydowns with lenders and sellers.
Negotiating with lenders and exploring lender credits
Shop around with the best mortgage lenders, and see if any are offering promotions. If rates are high, lenders may offer buydown promos to tempt buyers away from other companies. If you're not finding any, get loan quotes from several lenders and use those estimates to negotiate with others. There's a chance some will offer temporary buydowns to remain competitive.
Seller contributions
To get a home seller to cover your buydown, work with your real estate agent. Sellers are more likely to pay for buydowns in a buyer's market — when there are more properties for sale than buyers. They also may prefer to offer a buydown than lower the price of the home (the math usually works out better in the long run).
And if you do secure a seller buydown, make sure it's clearly outlined in your purchase contract. That's a legally binding document that both buyer and seller must adhere to.
Interest rate buydowns FAQs
What is an interest rate buydown?
An interest rate buydown allows a borrower or other party, like a lender or seller, to pay an upfront fee to reduce the interest rate on a mortgage. This leads to lower monthly payments, either for a few years or the life of the loan.
What's the difference between temporary and permanent buydowns?
Temporary buydowns reduce the interest rate and monthly payments for a few years at the beginning of the loan. Permanent buydowns lower the rate and payment for the entirety of the loan's term.
Should you buy down your interest rate?
To determine if buying down your rate is worth it, you'll need to calculate the break-even point and make sure you'll be in the home long enough the save more than the buydown cost.
How much can you buy down your interest rate?
Lenders typically have a limit on how much you can buy down your interest rate, so you'll need to ask your loan officer what the max is.
Are there any alternatives to buydowns for reducing mortgage payments?
You may be able to reduce your payment by taking out a smaller loan, making a larger down payment, or exploring low-rate government-backed loan programs. Having a good credit score can also help you get a lower interest rate and payment.
