Mortgage buydown: how paying points reduces your rate and payment
A mortgage buydown lets you pay upfront to permanently or temporarily reduce your interest rate. This glossary entry explains permanent buydowns (discount points), temporary 2-1 and 3-2-1 buydowns, builder concession buydowns, and how to calculate whether buying points makes financial sense.
A mortgage buydown is an upfront payment that reduces the interest rate — either permanently for the life of the loan, or temporarily for the first one to three years. Builders and sellers frequently offer buydowns as concessions. Understanding how points are priced and when the break-even makes sense is essential before closing on any loan with a rate reduction.
A mortgage buydown is an upfront payment of interest — expressed as discount points (1 point = 1% of loan amount) or a funded escrow account — that reduces the borrower's effective interest rate. Permanent buydowns lower the rate for the full loan term. Temporary buydowns lower the rate for an initial period before resetting to the contracted note rate.
Permanent vs temporary buydowns
- Rate reduced for entire loan term
- Paid by borrower at closing
- Disclosed on Loan Estimate, Section A
- Break-even typically 4–7 years
- Points may be tax deductible on purchase
- Best for buyers keeping the loan long-term
- Rate reduced for years 1–2 (or 1–3), then resets
- Often funded by seller, builder, or lender concession
- Difference held in escrow; released monthly to lender
- Unused funds applied to payoff if loan ends early
- Must qualify at note rate, not buydown rate
- Best for buyers expecting income growth or near-term refi
2-1 buydown worked example
| Year | Effective rate | Monthly P&I | Note-rate payment | Monthly subsidy |
|---|---|---|---|---|
| Year 1 | 5.0% | $2,147 | $2,661 | $514 |
| Year 2 | 6.0% | $2,398 | $2,661 | $263 |
| Year 3+ | 7.0% | $2,661 | $2,661 | $0 |
Total buydown cost funded at closing: ~$9,324 (12 × $514 + 12 × $263). If paid by seller or builder, this is equivalent to a price concession of that amount.
Break-even calculation for permanent points
External references
- CFPB — Discount points and lender credits explained
- CFPB — Understanding the Loan Estimate
- Fannie Mae — Temporary interest rate buydowns (selling guide)
- IRS Topic 504 — Home mortgage points deductibility
- CFPB — Explore rates tool
- Investopedia — Mortgage points guide
Common questions
What is a mortgage buydown?
A mortgage buydown is an upfront payment — made by the borrower, seller, or builder — that reduces the interest rate on a mortgage loan. Permanent buydowns (discount points) lower the rate for the life of the loan. Temporary buydowns reduce the rate for only the first 1–3 years before resetting to the note rate. The CFPB's explanation of discount points and lender credits covers the fundamental tradeoff.
How does a 2-1 buydown work?
A 2-1 buydown temporarily reduces the rate by 2% in year one and 1% in year two, then the loan resets to the permanent note rate from year three onward. The lender collects the full note-rate payment; the difference is pre-funded from an escrow account paid at closing. If the borrower refinances or sells before year three, the unused escrow is typically applied to payoff. The Fannie Mae selling guide on temporary buydowns covers eligibility and escrow account requirements.
What does one discount point cost and how much does it reduce the rate?
One discount point equals 1% of the loan amount — on a $400,000 loan, one point costs $4,000. The rate reduction per point varies by lender, market conditions, and loan term, but is commonly 0.20–0.25% per point on 30-year fixed mortgages. The exact tradeoff is disclosed on the Loan Estimate in Section A. Always compare the break-even period before purchasing points.
When do builder buydowns make sense for buyers?
Builders often offer 2-1 buydowns as a concession instead of reducing the purchase price, because it preserves the appraised value and their comparable sales record. For buyers who expect income growth or plan to refinance within three years, the temporary payment reduction can be more useful than a permanent price reduction. The NAHB Housing Market Index tracks builder use of incentives like rate buydowns as market conditions change.
How do you calculate the break-even on buying discount points?
Divide the upfront cost of the points by the monthly payment reduction. For example: 2 points on a $350,000 loan = $7,000 cost; if that reduces the rate from 6.75% to 6.25%, the payment drops by about $112/month. Break-even = $7,000 ÷ $112 = 62.5 months (~5.2 years). If you keep the loan beyond 62 months, buying points was worthwhile. Use the CFPB Explore Rates tool to compare point scenarios across current lender offers.
Are discount points tax deductible?
Points paid on a home purchase loan are generally deductible in the year paid if they meet IRS requirements — the loan is for your primary residence, points are an established practice in your area, and the amount does not exceed what is customary. Points paid on a refinance must typically be deducted over the loan term. The IRS Topic 504 on home mortgage points details the deductibility rules, but consult a tax professional for your specific situation.
Model how buying points changes your payment on the mortgage calculator — or see the full payment breakdown with extra principal on the extra payment tool.