{"id":309089,"date":"2025-01-31T00:53:50","date_gmt":"2025-01-31T05:53:50","guid":{"rendered":"https:\/\/www.houzeo.com\/blog\/?p=309089"},"modified":"2026-05-07T06:42:11","modified_gmt":"2026-05-07T10:42:11","slug":"buydown-mortgage","status":"publish","type":"post","link":"https:\/\/www.houzeo.com\/blog\/buydown-mortgage\/","title":{"rendered":"Mortgage Buydown: What Is It, and Is It Worth the Money?"},"content":{"rendered":"\n

Over 82%<\/a> of cash-out re-financers and almost 60% of non-cash-out re-financers chose to buy down their rate in 2023. Nearly 61% of borrowers with home loans paid discount points in September 2023, up from 31% in 2021. <\/p>\n\n\n\n

Fannie Mae predicts mortgage rates to soar to 6.6%<\/a> in 2024. This makes discount points a straightforward option for many homebuyers to be able to afford their new home. Buying down interest rates can help save thousands of dollars on mortgage payments.<\/p>\n\n\n\n

We have also done some of the heavy lifting for you. With Houzeo\u2019s list of mortgage lenders around you, finding one with terms suited to you has never been easier. Your home buying journey begins one click away, so don\u2019t wait! <\/p>\n\n\n\n

What Is a Mortgage Buydown<\/strong>?<\/h2>\n\n\n\n

A mortgage buydown is a financing arrangement that allows you to lower the interest rates on your mortgage by paying an upfront fee to the lender at closing. <\/p>\n\n\n\n

This fee may range from 1% to 4% of the total loan amount. The rates may be lower temporarily for an initial period of 1 to 3 years, or permanently for the life of the loan.  Sellers or builders offer this concession to decrease your monthly payments.<\/p>\n\n\n\n

How Much Does It Cost to Buy Down Interest Rates?<\/strong><\/h3>\n\n\n\n

A <\/strong>mortgage buydown requires an upfront fee called a \u2018point\u2019. The cost of buying down interest rates depends on how many points you or the seller purchase. 1 point costs 1% of the total loan amount and reduces the interest rate by 0.25% or 0.5%, depending on your lender.<\/p>\n\n\n\n

For example, a lender offers to lower the rates by 0.5% in exchange for a point. Then, on a $300,000 loan at 7% interest, paying 1 point ($3,000) will lower the rate to 6.5%. <\/p>\n\n\n\n

How Can You Buy Down a Mortgage?<\/strong><\/h2>\n\n\n\n

Buying down interest rates requires paying \u2018mortgage points<\/a>\u2019. There are two types of mortgage points\u2013 \u2018discount points\u2019, and \u2018purchase points\u2019. Each point, irrespective of the type, costs 1% of the loan amount. However, each of these types of points works differently in lowering the interest rates:<\/p>\n\n\n\n

1. Discount Points<\/strong><\/h3>\n\n\n\n

Paying \u2018discount points\u2019 reduces the interest rate permanently for the life of the loan. This way of buying down interest rates is ideal only if you can afford a high upfront fee. Either you or the seller can purchase discount points. <\/p>\n\n\n\n

Sellers may offer to do this to make the mortgage cheaper for you and to close the deal on a home. However, this concession comes at a price. The seller will hike the price of the home to recover his expenses on the buydown. <\/p>\n\n\n\n

2. Purchase Points<\/strong><\/h3>\n\n\n\n

Paying \u2018purchase points\u2019 upfront reduces the interest rate temporarily only for a few years at the beginning of the loan. Either you or the seller can pay purchase points. This way, you can save money since the mortgage payments will be lower. <\/p>\n\n\n\n

How Long Does It Take to Recover Buydown Costs?<\/strong><\/h3>\n\n\n\n

The time it will take you to recover the cost of a buydown is determined by calculating the break-even point:<\/p>\n\n\n\n

Break-even point = Total cost of discount points \/ monthly savings<\/p>\n\n\n\n

For example, if you take a loan of $400,000 at 6.75% interest, paying $4000 will reduce the interest rate to 6.25%. Your monthly savings would look like this:<\/p>\n\n\n\n

Points purchased<\/strong><\/td>Interest rate (%)<\/strong><\/td>Monthly payments<\/strong><\/td>Monthly savings<\/strong><\/td><\/tr>
1<\/td>6.25%<\/td>$2,771<\/td>$132<\/td><\/tr>
0<\/td>6.75%<\/td>$2,903<\/td>$0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

So, the break-even point here can be calculated as $4000 \/ $132 = 30 months, which is approximately 2.5 years. This means it will take you 2.5 years to recover the cost of the buydown. <\/p>\n\n\n\n

How Are Mortgage Buydowns Structured?<\/strong><\/h2>\n\n\n\n

Mortgage buydowns can be temporary or permanent, depending on the type of points purchased. <\/p>\n\n\n\n

Permanent Buydown<\/strong><\/h3>\n\n\n\n

You or the seller pay discount points to permanently reduce the interest rate for the full loan term. This helps you save more in the long run but requires a larger upfront cost.  The average life of a loan is 6 to 7 years<\/p>\n\n\n\n

Temporary Buydown<\/strong><\/h3>\n\n\n\n

You or the seller pay purchase points to temporarily reduce the rate for a few years at the start of the mortgage. This type of buydown is ideal to lower your mortgage payments until you attain a higher income. <\/p>\n\n\n\n

Temporary buydowns have different structures depending on the number of years the buydown period lasts:<\/p>\n\n\n\n

1-0 Buydown<\/strong><\/h4>\n\n\n\n

This is a temporary type of mortgage buydown. In this case, the interest rate is 1% lower only for the first year of the loan term. After this, the mortgage rate increases to the standard rate.<\/p>\n\n\n\n

For example, a 1-0 buydown on a 30-year fixed home loan, where you have borrowed $300,000 at an interest rate of 7%, will look like this:<\/p>\n\n\n\n

Year<\/strong><\/td>Interest rate (%)<\/strong><\/td>Monthly Payments<\/strong><\/td>Monthly savings<\/strong><\/td>Annual savings<\/strong><\/td><\/tr>
1<\/td>6<\/td>$1798.65<\/td>$196.76<\/td>$2361.12<\/td><\/tr>
2-30<\/td>7<\/td>$1995.41<\/td>$0<\/td>$0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Hence, in this type of mortgage buydown, you can save on monthly payments only in the first year of the loan. <\/p>\n\n\n\n

2-1 Buydown<\/strong><\/h4>\n\n\n\n

This is a temporary mortgage buydown. The points you purchase will lower the interest rate only for the first two years of the loan term. The rate is 2% lower in the first year, and in the second year, the rate is 1% lower. After that, the rates increase to the contract rates. <\/p>\n\n\n\n

Taking the previous example of a fixed loan of $300,000 at a 7% interest rate, your monthly savings will look like this:<\/p>\n\n\n\n

Year<\/strong><\/td>Interest rate (%)<\/strong><\/td>Monthly Payments<\/strong><\/td>Monthly savings<\/strong><\/td>Annual savings<\/strong><\/td><\/tr>
1<\/td>5<\/td>$1610.46<\/td>$384.95<\/td>$4619.40<\/td><\/tr>
2<\/td>6<\/td>$1798.65<\/td>$196.76<\/td>$2361.12<\/td><\/tr>
3 – 30<\/td>7<\/td>$1995.41<\/td>$0<\/td>$0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

3-2-1<\/strong> Buydown<\/strong><\/h4>\n\n\n\n

This is a temporary mortgage buydown. The interest rates are 3% lower in the first year, 2% lower in the second year, and 1% lower in the third year of the loan period. After this, they increase to match the standard interest rates. <\/p>\n\n\n\n

Using the same example as before, the buydown structure will be as follows:<\/p>\n\n\n\n

Year<\/strong><\/td>Interest rate (%)<\/strong><\/td>Monthly payments<\/strong><\/td>Monthly savings<\/strong><\/td>Annual savings<\/strong><\/td><\/tr>
1<\/td>4<\/td>$1,432.25<\/td>$563.16<\/td>$6757.92<\/td><\/tr>
2<\/td>5<\/td>$1610.46<\/td>$384.95<\/td>$4619.40<\/td><\/tr>
3<\/td>6<\/td>$1798.65<\/td>$196.76<\/td>$2361.12<\/td><\/tr>
4 – 30<\/td>7<\/td>$1995.41<\/td>$0<\/td>$0<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Should You Buy Down Mortgage Rates?<\/strong><\/h2>\n\n\n\n

Buying down interest rates on a home loan may be a good option for you, depending on various factors. These factors are explained below.<\/p>\n\n\n\n

Who Pays the Discount Points?<\/strong><\/h3>\n\n\n\n

If the seller or builder of the home you want to purchase offers to contribute towards the buydown, it may be a good option as you don\u2019t have to worry about paying anything upfront. <\/p>\n\n\n\n

A seller may offer to pay for the buydown in order to incentivize you to buy the home. The points they may purchase will be counted as \u2018seller concessions<\/a>\u2019. <\/p>\n\n\n\n

Can You Afford a Buydown?<\/strong><\/h3>\n\n\n\n

A buydown may be expensive after paying down payments and closing costs on a mortgage. Each point paid towards a buydown costs 1% of the total home loan and usually lowers the rate by 0.25% – 0.50%. <\/p>\n\n\n\n

Hence, if you take a loan of $400,000, lowering the interest rate by 1% can cost between 2 and 4 points. As each point costs 1% of the total loan amount, the final cost may lie between $8000 and $16,000.<\/p>\n\n\n\n

However, to get an estimate you must use a mortgage calculator<\/a>. It will help you determine your monthly payments. This will give you a clear picture of how much you need to buydown. <\/p>\n\n\n\n

Do You Expect a Higher Income?  <\/strong><\/h3>\n\n\n\n

A temporary buydown can lower your monthly payments until you attain a higher income. For example, if you are getting a promotion at work or a professional degree that will pay you well, a temporary buydown will help you save until the buydown period lasts. <\/p>\n\n\n\n

How Long Do You Plan to Stay?<\/strong><\/h3>\n\n\n\n

A permanent buydown may be a good option if you plan to stay in the home for a longer period of time, as it will give you better savings. It may be a bad option to sell or refinance the home before you recover the expenses of the buydown.<\/p>\n\n\n\n

For example, if you buy down the interest rates on a mortgage by paying $4000 and your monthly savings are $132, it will take you 2.5 years to recover the $4000 you paid for the buydown.  Hence, it will not make sense to sell the home before the 2.5 year mark.<\/p>\n\n\n\n

Does the Buydown Have a Limit?<\/strong><\/h2>\n\n\n\n

Yes, there are limits to how much you can buy down on mortgages. The limits vary with the lender, type of loan, and your credit scores. Have a look below:<\/p>\n\n\n\n