Rate Buydown

A rate buydown is a financing arrangement that reduces the interest rate on a mortgage, either permanently or for a defined initial period, in exchange for an upfront payment. Two main types: (1) Permanent buydown — you pay discount points at closing (each point = 1% of the loan amount) to reduce the rate for the life of the loan; (2) Temporary buydown — funds are deposited into an escrow account at closing and used to subsidize your monthly payments in years 1 and 2 (or 1, 2, and 3) so your effective rate is lower during that period. After the buydown period, payments revert to the full rate. Full definition at CFPB discount points and buydowns.

A 2-1 buydown reduces your rate by 2% in year 1 and 1% in year 2, then reverts to the full note rate in year 3 and beyond. Example on a $400,000 loan at a 7.00% note rate: Year 1: effective rate = 5.00%, payment = $2,147/month. Year 2: effective rate = 6.00%, payment = $2,398/month. Year 3+: full rate = 7.00%, payment = $2,661/month. The difference between the subsidized payments and the full payments is funded by a deposit into a buydown escrow at closing — approximately $6,768 for this example. The seller typically funds this as a concession. Unlike an ARM, the 2-1 buydown rate reverts to the permanently locked note rate — there is no risk of rates rising above the note rate. See the seller concession buydown guide for 2027 seller negotiation context.

Break-even = upfront cost ÷ monthly savings. Example: paying 1 point ($4,000 on a $400,000 loan) to reduce the rate from 7.00% to 6.75%. Monthly payment at 7.00%: $2,661. Monthly payment at 6.75%: $2,594. Monthly savings: $67. Break-even: $4,000 ÷ $67 = 60 months (5 years). If you keep the loan for more than 5 years, the buydown saves you money. If you sell or refinance before 5 years, you paid more than you saved. Key consideration: if you're likely to refinance within 2–3 years (rates expected to fall), buying points may not be worth it. The CFPB points and credits guide walks through break-even analysis.

Yes — seller-funded buydowns are a common negotiating tool in buyer-favorable markets. In 2027, with elevated rates, many sellers offer temporary buydowns (2-1 or 3-2-1) as a closing cost concession rather than reducing the asking price, because: (1) The seller's net proceeds are similar, but the buyer's near-term payment is lower, making the deal easier to execute; (2) A buydown concession is often more tax-efficient for buyers (deductible points) than a price reduction. Seller contribution limits apply: conventional loans allow 2–9% in seller concessions (depending on LTV); FHA allows up to 6%; VA allows up to 4%. The buydown deposit must fall within these limits. Explore this strategy in the mortgage rate buydown and seller concession guide.

They describe the same mechanism differently: Discount points is the general term for upfront fees paid to reduce a mortgage rate — each point = 1% of the loan amount = typically 0.25% rate reduction (varies by lender, market, and loan type). A permanent rate buydown uses discount points to reduce the rate for the full loan term. A temporary rate buydown (2-1, 3-2-1) is not accomplished through discount points — instead, a lump sum is deposited in a buydown escrow account and released monthly to cover the payment subsidy. These are structurally different: points are paid to the lender at origination; temporary buydown funds sit in escrow and are disbursed over the buydown period. If you refinance during a temporary buydown, the remaining escrow balance is typically applied to the new loan or refunded. See the mortgage points glossary entry for points in detail.

In the US: (1) Permanent buydown points paid at closing on a primary residence purchase are generally deductible as home mortgage interest in the year paid, subject to IRS rules. The points must be calculated as a percentage of the loan, paid from your own funds (not financed), and represent an established business practice in your area. (2) Seller-paid points on your behalf are also deductible by the buyer, but reduce the property's cost basis. (3) Temporary buydown escrow deposits are not points — the escrow releases are applied as interest payments and the interest portion is deductible as it accrues, not in the year of deposit. Consult a CPA for your specific situation. The IRS Topic 504 (Home Mortgage Points) explains deductibility requirements.