What is an interest rate buydown?

An interest rate buydown is a financing strategy where someone (the buyer, seller, or builder) pays an upfront fee to reduce the mortgage interest rate, usually for the first few years—or sometimes for the entire loan.

🔑 Two Main Types of Buydowns

1. Temporary Buydown (most common)

The rate is reduced for the first 1–3 years, then returns to the full rate.

Example: “2-1 buydown”

• Year 1: Rate is 2% lower

• Year 2: Rate is 1% lower

• Year 3+: Full rate

💡 Why it’s used:
Helps buyers ease into payments—especially useful if they expect income to rise or plan to refinance.

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2. Permanent Buydown

Also known as paying discount points.

• You pay upfront at closing

• Your interest rate is reduced for the entire life of the loan

💡 Why it’s used:
Saves more long-term interest if you plan to stay in the home for many years.

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💰 Who Pays for It?

• Buyer – to lower their monthly payment

• Seller or builder – as an incentive to attract buyers (very common in slower markets)

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📊 Simple Example

Let’s say:

• Loan: $400,000

• Normal rate: 6.5%

With a 2-1 buydown:

• Year 1: 4.5% → much lower payment

• Year 2: 5.5%

• Year 3+: 6.5%

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⚖️ Pros & Cons

Pros

• Lower initial monthly payments

• Easier qualification for buyers

• Can make a home more affordable short-term

Cons

• Upfront cost (can be several thousand dollars)

• Temporary buydowns don’t reduce long-term rate

• Risk if you can’t refinance or your income doesn’t increase

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🧠 When It Makes Sense

• You expect rates to drop and plan to refinance

• You need short-term payment relief

• A seller is offering it as a concession