What Is a Buydown Mortgage? A Homebuyer’s Guide
When shopping for a mortgage, you’ve likely come across various terms like fixed-rate, adjustable-rate, and interest-only loans. But one lesser-known and often misunderstood option is the buydown mortgage. In this post, we’ll explain what a buydown mortgage is, how it works, the pros and cons, and whether it might be the right choice for your financial situation.
What Is a Buydown Mortgage?
A buydown mortgage is a type of home loan where the interest rate is temporarily or permanently reduced through upfront payments, often called “points.” This lower interest rate reduces the borrower’s monthly payments during the early years—or throughout the entire term—of the loan.
Buydown mortgages are particularly appealing to first-time homebuyers or those expecting their income to increase in the future. They’re also sometimes used as a seller or builder incentive to make the purchase more attractive.
How Does a Buydown Mortgage Work?
A buydown mortgage typically involves paying additional money upfront and at closing to lower the interest rate for a specific period. This can happen in two main ways:
1. Temporary Buydown
In a temporary buydown, the interest rate is reduced for the first few years of the loan, after which it reverts to the full rate.
Common structures include:
- 3-2-1 Buydown: The interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year.
- 2-1 Buydown: The rate is 2% lower in year one and 1% lower in year two.
🧠 Example: Suppose you’re approved for a 30-year mortgage at 6% interest for a $300,000 loan with a 2-1 buydown:
- Year 1: Interest rate is 4%, monthly payment = ~$1,432
- Year 2: Interest rate is 5%, monthly payment = ~$1,610
- Year 3 and beyond: Interest rate is 6%, monthly payment = ~$1,799
This structure gives you time to adjust financially before taking on full payments.
2. Permanent Buydown
In a permanent buydown, you pay discount points (typically 1 point = 1% of the loan amount) to lower the interest rate for the entire life of the loan. This leads to consistent savings on monthly payments over time.
Who Pays for the Buydown?
There are several possibilities when it comes to covering the cost of a buydown:
- The Buyer: You may choose to pay for the buydown yourself to secure lower monthly payments upfront.
- The Seller: Sellers in a competitive market may offer to pay for a buydown as an incentive to close the deal.
- The Builder: In new construction, builders may offer buydown programs to encourage home purchases.
Negotiating a seller-paid buydown can be a smart move, especially in a buyer’s market.
What Does a Buydown Mortgage Cost?
The cost of a buydown depends on:
- The loan amount
- The number of points being purchased
- The structure of the buydown (temporary vs permanent)
For a temporary buydown, the cost is generally the difference between the payments at the reduced rate and the full interest rate, multiplied over the buydown period. For a permanent buydown, the cost depends on how many points you buy and how much they reduce the interest rate.
🧮 Example: Buying 1 point on a $300,000 loan might cost $3,000 and reduce the interest rate by 0.25%.
Pros of a Buydown Mortgage
✅ Lower Initial Payments
One of the biggest benefits is reduced monthly payments during the early years of your loan. This can help with budgeting and reduce financial stress during the transition into homeownership.
✅ Easier Loan Qualification
Lower initial payments may help you qualify for a loan you might otherwise not afford under traditional terms.
✅ Helpful for Rising Income
If you’re expecting your income to grow—due to career advancement, a new job, or business growth—a buydown can be a helpful bridge.
✅ Seller or Builder Incentives
If the buydown is paid by the seller or builder, you get the benefit without the extra cost.
Cons of a Buydown Mortgage
⚠️ Upfront Cost
Whether you pay for it or it’s built into the sale price, a buydown involves real money upfront.
⚠️ Payment Shock
If you opt for a temporary buydown, you’ll need to be prepared for a jump in monthly payments after the reduced-rate period ends.
⚠️ Short-Term Ownership Risk
If you sell or refinance the home early, you may not recoup the cost of the buydown—especially with a permanent buydown.
⚠️ May Not Always Be Worth It
In some markets, the money spent on a buydown may yield a better return if put toward a higher down payment or used to pay off debt.
When Does a Buydown Mortgage Make Sense?
A buydown mortgage could be the right option if:
- You’re a first-time buyer needing manageable initial payments
- You expect your income to rise in the near future
- You’re receiving help from a seller or builder to cover the cost
- You’re planning to stay in the home long enough to benefit from the savings
However, if you plan to sell or refinance soon, or you’re tight on cash at closing, a buydown might not be ideal.
Final Thoughts: Is a Buydown Mortgage Right for You?
A buydown mortgage can be a smart financial move for the right buyer, offering short-term payment relief and long-term savings. However, it’s important to carefully evaluate the cost-benefit balance and think about your long-term homeownership goals.
Before committing to a buydown, ask your lender to provide a break-even analysis. This will help you understand how long it will take for the reduced payments to equal the cost of the buydown.
Frequently Asked Questions
🔹 Is a buydown the same as buying points?
Not exactly. Buying points usually refers to permanently lowering your interest rate, while temporary buydowns reduce rates for a limited period.
🔹 Can I refinance after a buydown?
Yes, but you may not recover the cost of the buydown if you refinance too soon.
🔹 Do buydowns affect credit?
No, they don’t impact your credit score. However, failing to prepare for increased payments after the buydown period could lead to financial stress.