A mortgage buydown is a financing strategy where the borrower or a third party, such as the seller or builder, pays an upfront sum to reduce the interest rate on the loan, making monthly payments lower, especially in the early years of the mortgage.

There are two main types of buydowns:

1. Permanent Buydown:

The borrower or seller pays an upfront fee to permanently reduce the interest rate for the life of the loan.

This is often referred to as “discount points,” where one point typically costs 1% of the loan amount and can reduce the interest rate by about 0.25%.

Example: For a $300,000 loan, paying 2 points (or $6,000) might reduce the interest rate from 5% to 4.5%, lowering monthly payments.

2. Temporary Buydown (e.g., 2-1 Buydown):

A temporary buydown reduces the interest rate for a limited period, usually the first few years of the mortgage.

Example: 2-1 Buydown

In the first year, the interest rate is 2% lower than the fixed rate.

In the second year, it is 1% lower.

After that, the rate returns to the original fixed rate for the remaining term.

This type of buydown helps ease the borrower into larger payments by starting with lower payments that gradually increase.

Who Pays for the Buydown?

Borrower: If the borrower chooses to buy down the rate, they pay the upfront fee at closing.

Seller/Builder: Sometimes sellers or builders offer to cover the buydown costs as an incentive to attract buyers.

Is a Buydown Worth It?

A buydown can be beneficial if:

The borrower expects to stay in the home long enough to recoup the upfront cost through lower monthly payments (for permanent buydowns).

They anticipate higher income in the future, allowing them to handle the increasing payments (for temporary buydowns).

It helps qualify for the loan by lowering the initial monthly payment.

However, it’s important to calculate the break-even point to determine whether the upfront costs are worth the long-term savings.