How a Mortgage Buydown Can Lower Your Interest Rate

There are several ways to make a mortgage payment more affordable, such as a larger down payment, a longer loan term or a lower purchase price. Another tool that often gets overlooked is a buydown, where money paid upfront reduces the interest rate on your loan. Here is how it works and how to tell whether it fits your plans.

What Is a Buydown?

A buydown is a fee paid at closing in exchange for a lower interest rate. The fee is usually expressed in discount points. One point equals 1% of your loan amount. How much each point lowers your rate varies by lender, loan program and market conditions, so you will want to see actual quotes for your scenario.

There are two main types of buydowns.

Permanent Buydown

With a permanent buydown, you pay points to lower your rate for the entire life of the loan. This costs more upfront, but because the lower rate never goes away, the savings can be substantial over many years.

Temporary Buydown

A temporary buydown lowers your rate for the first few years, then it steps up to the full note rate. A common structure is a 3-2-1 buydown, where the rate is reduced most in year one, a bit less in year two, less again in year three, and reaches the full rate in year four. A 2-1 buydown works the same way over two years. The upfront cost is placed in an account that covers the difference in your payment during those early years.

Temporary buydowns can help buyers who expect their income to grow or who want some breathing room right after a move. Just be sure you are comfortable with the full payment that kicks in later.

Who Pays for It?

You can pay for a buydown yourself, but you do not always have to. In some transactions:

• Sellers may offer to pay for a buydown as an incentive, especially when homes are taking longer to sell.
• Builders of new construction homes sometimes include buydowns in their promotions.

Seller and builder contributions are subject to limits that vary by loan program, so check with your loan officer about what is allowed.

How to Know If It Pays Off

The key question is how long it takes for your monthly savings to cover the upfront cost. That is your breakeven point. To estimate it:

1. Find the total cost of the points.
2. Compare the monthly payment with and without the buydown.
3. Divide the cost by the monthly savings. The result is the number of months to break even.

If you expect to keep the loan well past that point, a permanent buydown may be worth considering. If you might sell or refinance sooner, you may not recover the cost. Our mortgage calculator can help you compare payments at different rates.

Things to Weigh Before You Decide

• Down payment versus points: if your cash is limited, putting more toward your down payment can sometimes do more good, for example by reducing or avoiding mortgage insurance on a conventional loan.
• Loan type: some scenarios, such as certain investment property loans or cash-out refinances, may have different pricing or limits on buydowns.
• Future refinancing: if you think you may refinance in the next few years, factor that into your breakeven math.

Questions to Ask Your Loan Officer

• How much would one point lower my rate on this loan today?
• What does the payment look like with a permanent buydown, a temporary buydown and no buydown?
• Can the seller’s contribution be used for a buydown in my contract?
• How many months until I break even on each option?

Getting these answers in writing makes it much easier to compare offers and choose with confidence.

Every borrower’s situation is different, and the right choice depends on your budget, timeline and goals. A FLO Mortgage loan officer can show you side-by-side options with and without a buydown. Contact us to run the numbers together.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.