Buydown
A buydown is a financing arrangement where upfront cash payments reduce the mortgage interest rate, either temporarily or permanently. A temporary buydown (such as a 2-1 buydown) lowers the rate for the first 1–3 years. A permanent buydown purchases a lower rate for the life of the loan through discount points.
In a 2-1 buydown on a 7% mortgage, the rate is 5% in year one, 6% in year two, and 7% from year three onward. The seller or builder typically funds the buydown by depositing money into an escrow account at closing — the difference between the reduced payment and the full payment is drawn from that account each month. Buydowns became popular in the 2022–2024 rate environment as a builder incentive.
For a $400,000 loan at 7%, a 2-1 buydown saves the buyer roughly $4,800 in year one and $2,400 in year two — a total of about $7,200. The cost to fund the buydown is roughly the same amount, so the builder or seller is essentially prepaying your interest.
A permanent buydown works differently: you pay discount points upfront to lock in a lower rate for the entire term. Each point costs 1% of the loan and typically reduces the rate by 0.25%. The breakeven period — how long before the monthly savings exceed the upfront cost — is usually 3–5 years.
Key Takeaway
A buydown is a financing arrangement where upfront cash payments reduce the mortgage interest rate, either temporarily or permanently. A temporary buydown (such as a 2-1 buydown) lowers the rate for the first 1–3 years. A permanent buydown purchases a lower rate for the life of the loan through discount points.
Related Terms
Frequently Asked Questions
The buyer, seller, builder, or lender can fund a buydown. In competitive markets, sellers or builders often offer buydowns as an incentive.
A 2-1 buydown reduces your rate by 2% in year one and 1% in year two, then returns to the full rate from year three onward.
It depends on your plans. If you expect to refinance before the rate steps up, or if the seller is funding it at no cost to you, a buydown can be very beneficial.
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