Buydown mortgages, a strategy to lower interest rates, involve an upfront payment to reduce initial monthly mortgage costs. How a buydown mortgage works depends on its type: temporary buydowns offer short-term rate reductions (e.g., 2-1 buydown), while discount points (permanent buydowns) reduce the rate for the loan’s life. Temporary buydowns suit those expecting income increases or planning to refinance, often paid by sellers. Discount points, typically buyer-paid, benefit long-term homeowners by providing significant lifetime interest savings.
The good news is that there are effective strategies designed to do just that. Two of the most talked-about options are:
- Temporary Buydowns – offering short-term relief on interest rates
- Discount Points – providing long-term interest savings by paying upfront
While both aim to reduce the financial burden of homeownership, they work very differently. In this guide, we’ll walk through the mechanics of each, compare the numbers, and help you decide which strategy makes the most sense based on your budget, timeline, and long-term goals.
What Is a Buydown?
A buydown is a method of reducing the interest rate on a mortgage for a period of time (temporary buydown) or for the life of the loan (discount points, also called permanent buydown). Each approach has its own use case, costs, and benefits.
Let’s break them down:
Temporary Buydowns
A temporary buydown lowers your interest rate for the first one to three years of your mortgage before reverting to the full, fixed rate. This structure is often used by buyers who expect their income to rise in the near future or who plan to refinance before the higher rate kicks in.
Common Structures:
- 2-1 Buydown:
- Year 1: Interest rate reduced by 2%
- Year 2: Reduced by 1%
- Year 3+: Returns to the full note rate
- 3-2-1 Buydown:
- Year 1: Reduced by 3%
- Year 2: Reduced by 2%
- Year 3: Reduced by 1%
- Year 4+: Returns to the full rate
Who Pays for It?
Typically, the cost is paid upfront by the seller, builder, or lender as a buyer incentive or closing negotiation tool. Sometimes, it can be built into the deal through concessions.
Discount Points (Permanent Buydowns)
Discount points involve paying a lump sum at closing to permanently reduce your interest rate for the entire life of the loan. Each point generally equals 1% of your loan amount and typically reduces your rate by about 0.25%, although this can vary.
For example:
- On a $400,000 loan, 1 point = $4,000
- Reducing your rate from 7% to 6.75% would lower your monthly payment and total interest over the life of the loan
Who Pays for It?
This is usually paid by the buyer at closing as part of their out-of-pocket expenses.
Side-by-Side Numerical Comparison
Let’s compare the numbers using this scenario:
- Loan Amount: $400,000
- Loan Term: 30-year fixed
- Note Rate: 7% (without buydown or points)
- Monthly Principal & Interest (P&I): $2,661
Scenario 1: 2-1 Buydown
| Year | Interest Rate | Monthly Payment | Monthly Savings |
| 1 | 5% | $2,147 | $514 |
| 2 | 6% | $2,398 | $263 |
| 3+ | 7% | $2,661 | $0 |
Total Savings Over 2 Years: ≈ $9,300
Cost to Fund (Paid by Seller/Builder): ~$9,300
Scenario 2: Discount Points (2 Points = $8,000)
- New Interest Rate: 6.5%
- New Monthly Payment: $2,528
- Monthly Savings: $133
- Break-even Period: ~60 months (5 years)
- Lifetime Interest Savings (30 years): ≈ $48,000
Key Differences at a Glance
Feature |
Temporary Buydown |
Discount Points (Permanent) |
| Duration of Reduced Rate | 1–3 years | Entire loan term |
| Initial Monthly Savings | High | Moderate |
| Long-Term Savings | Limited | Significant |
| Break-even Timeline | Immediate | 5–7 years (depending on points) |
| Who Usually Pays | Seller or builder | Buyer at closing |
| Best For | Short-term buyers, first-time homeowners | Long-term buyers, investors |
Pros and Cons
Temporary Buydown
Pros:
- Immediate and substantial monthly savings
- Reduces financial stress during transition to new home
- Often paid by seller or builder, reducing buyer costs
- Great for buyers expecting future income increases
Cons:
- Only short-term benefit
- Full payment kicks in later—buyers must plan ahead
- If you refinance early, some of the subsidy might go unused
Discount Points
Pros:
- Long-term interest savings
- Locks in a lower rate for the entire loan
- Helps offset the effect of higher rate environments
- May reduce debt-to-income ratio and improve loan approval chances
Cons:
- Requires significant cash upfront
- Less helpful if you move or refinance within a few years
- Long break-even timeline if you sell early
How to Choose the Right Strategy
Ask Yourself:
- How long do I plan to stay in the home?
- <3 years: Temporary buydown is more cost-effective
- >5 years: Discount points likely offer more value
- Do I have enough cash at closing to pay for points?
- No? Lean toward a seller-paid temporary buydown
- Yes? Consider whether you’ll break even on points
- Can I negotiate seller concessions?
- If yes, use concessions to fund either strategy
- Is refinancing part of my long-term plan?
- If you plan to refinance in a few years, temporary buydowns offer short-term relief without overpaying on upfront points
Real-Life Scenarios
First-Time Buyer
Samantha is purchasing her first home with limited savings. She gets a seller-funded 2-1 buydown that gives her lower payments for the first two years while she adjusts to new expenses. She plans to refinance when rates drop.
Investor
John is buying a rental property and plans to hold it for 10 years. He opts to pay 2 points at closing to lock in a permanently lower rate, improving his monthly cash flow and increasing his total ROI over time.
Builder Promotion
A homebuilder is offering a 3-2-1 buydown as part of a move-in incentive. The buyer benefits from three years of reduced payments without any out-of-pocket cost, making the home significantly more affordable in the early stages.
Strategic Tips
- Use seller concessions wisely: In buyer-friendly markets, negotiate for buydowns instead of price reductions.
- Compare break-even points: Ask your lender to calculate how long it will take to recover the cost of points.
- Check loan type compatibility: Both strategies are available on many FHA, VA, and conventional loans, but check with your lender.
- Monitor market trends: If rates are expected to drop, a temporary buydown may work better with a refinance strategy.
Final Takeaways
Choosing between a temporary buydown and discount points ultimately depends on your timeline, budget, and long-term financial goals. If you plan to move or refinance within the next 2–3 years or want upfront savings with minimal long-term commitment, a temporary buydown is typically the better choice. On the other hand, if you expect to stay in the home for five years or more and can afford higher closing costs, paying discount points may offer more value through consistent long-term savings. If you’re negotiating with a motivated seller, either option could work depending on what best supports your overall strategy and financial flexibility.
