What Is a Rate Buydown and Is It Worth It?
A rate buydown temporarily reduces your mortgage rate for the first one to three years. Here is how the math works and when it makes financial sense.
A rate buydown is a financing arrangement that temporarily reduces the borrower's interest rate for the first one to three years of the loan. The cost of the reduced payments is paid upfront at closing, typically by the seller, builder, or lender as a credit or concession.
How Buydowns Are Structured
The most common buydown is the 2-1 structure. In year one, the rate is 2 percentage points below the permanent note rate. In year two, it is 1 point below. Starting in year three, the borrower pays the full note rate for the remaining term. There is also a 3-2-1 buydown (three years of reduced rates) and a 1-0 buydown (one year of reduction). The funds to cover the difference between the reduced payments and the full payments are deposited into an escrow account at closing.
A Real Example
On a $450,000 loan at a 6.75% note rate, the full monthly principal and interest payment would be approximately $2,919. With a 2-1 buydown, year one at 4.75% would cost roughly $2,348 per month, and year two at 5.75% would be about $2,627. That is a combined savings of roughly $10,500 over the first two years. The cost to fund that buydown is typically around $9,000 to $11,000, depending on the lender.
Buydown vs. Discount Points
Buydowns and discount points both reduce payments, but in different ways. Discount points permanently lower the interest rate for the entire loan term. A buydown provides a temporary reduction. If you plan to hold the loan for many years, permanent discount points may save more over time. If you expect to sell or refinance within a few years, a buydown often delivers more immediate value because the savings are front-loaded.
When a Buydown Is Worth It
Buydowns tend to create the most value in these situations:
- The seller is offering concessions and you can direct those funds toward the buydown instead of closing cost credits
- You expect your income to increase over the next two to three years and want lower payments in the early period
- You plan to refinance when rates drop, making the permanent note rate less important
- New construction, where builders frequently offer buydown incentives
Run the Numbers Yourself
Compare the cost of a 2-1 buydown against your full-rate payment to see how much you would save during the reduced-rate period.
Try the Rate Relief Calculator →When It May Not Be Worth It
If you are paying for the buydown out of your own pocket rather than using seller concessions, the math changes. You are spending cash today for payment relief spread over one to three years. In many cases, that money could be used for a larger down payment, which permanently reduces the loan amount, or invested elsewhere. Run the numbers with your loan officer to compare all the options before deciding.
Written by
The Katalyst Team
ETHOS Lending, Inc.
