Understanding Rate Buydowns: A Smart Way to Save on Your Mortgage

When you’re exploring mortgage options, you’ll hear a lot of terms thrown around—interest rates, closing costs, down payment assistance, PMI. One strategy that doesn’t get talked about enough is the rate buydown. This option can make your monthly payment more affordable, especially in the early years of your loan, and it’s worth considering if you’re looking for ways to maximize your buying power.

Let’s break it down.

What Is a Rate Buydown?

A rate buydown is when you (or sometimes the seller or builder) pay money upfront at closing to temporarily or permanently lower your mortgage interest rate. Think of it as “prepaying” some of the interest, which gives you a lower monthly payment.

This can be an attractive tool in today’s market—especially when affordability is tight and buyers are looking for ways to ease into homeownership.

Types of Rate Buydowns

1. Permanent Buydown

• You pay points upfront (often called “discount points”).

• Each point typically equals 1% of your loan amount and usually lowers your interest rate by about 0.25%.

• Example: On a $300,000 loan, 1 point = $3,000. Paying that might reduce your rate from 6.5% to 6.25%—for the life of the loan.

💡 How much could this save you?
At 6.5%, the monthly principal and interest on $300,000 is about $1,896.
At 6.25%, it drops to about $1,847. That’s $49/month. Over a 30-year loan, that’s roughly $17,640 in lifetime savings—for a $3,000 upfront investment.

✅ Best for buyers planning to stay in the home long-term.

2. Temporary Buydown (2-1, 3-2-1, etc.)

• The seller, builder, or lender funds a temporary reduction in your interest rate for the first few years.

• 2-1 Buydown: Rate is 2% lower in year 1, 1% lower in year 2, then returns to the full rate.

• 3-2-1 Buydown: Rate is 3% lower in year 1, 2% lower in year 2, 1% lower in year 3, then resets.

Example: If your “real” rate is 6.5%, a 2-1 buydown means you’d pay 4.5% in year 1, 5.5% in year 2, then 6.5% afterward.

✅ Best for buyers who expect their income to increase or who plan to refinance before the full rate kicks in.

3. Seller-Funded Buydown

• Common in new construction or competitive listings.

• Instead of reducing the list price, a seller may offer a credit to “buy down” your rate, making the home more affordable.

• Example: A seller offering a $10,000 credit could fund a 2-1 buydown for you. On a $350,000 loan at 6.5%, your payment could start at around $1,770 in year 1 instead of $2,212—a $442 monthly savings in the first year.

💡 How much more home could this help you afford?
Think of it this way: If your budget is capped at a $2,000 monthly payment, the buydown could allow you to qualify for a loan closer to $350,000–$360,000 instead of $300,000–$310,000. In other words, a seller concession could expand your purchasing power by $40,000–$50,000, without you having to stretch your monthly budget.

✅ Helps buyers with monthly affordability and makes the seller’s property more appealing.
✅ For sellers, it can be smarter than a price reduction, since lowering the buyer’s payment often has more impact than cutting $10,000 off the sales price.

Is a Buydown Right for You?

Here are a few things to weigh:

• How long do you plan to stay in the home? If long-term, a permanent buydown may save more.

• Do you expect your income to grow? A temporary buydown could be a smart bridge.

• Would you rather lower your payment or your cash-to-close? Sometimes putting money toward a buydown makes more sense than toward a bigger down payment.

Final Thoughts

Rate buydowns can be a win-win: sellers get homes sold, and buyers get breathing room in their budget. Like all financing strategies, it’s not one-size-fits-all. The right option depends on your goals, how long you’ll be in the home, and what you can comfortably afford at closing.

👉 Next step: Talk with a trusted lender to run the numbers on different buydown options side by side. That way, you’ll see exactly how much you’d save and whether it’s worth the upfront investment. I'm happy to recommend a few trusted lenders if you need somewhere to start!