February 27, 2026
A mortgage rate buydown reduces your interest rate by having a seller, builder, or lender prepay a portion of your interest upfront, resulting in lower monthly payments during the early years of your loan — or for the life of it. The cost is calculated as the difference between your payment at the note rate and the reduced rate, multiplied by the number of months in the buydown period. Whether you're stretching to qualify or simply want more breathing room in your first years of homeownership, a buydown can be a smart, strategic tool — as long as you understand exactly what you're paying for.
What Is a Mortgage Rate Buydown?
A mortgage rate buydown is a financing arrangement in which funds are deposited into an escrow account at closing to subsidize your interest rate for a set period. Those funds are drawn down each month to cover the gap between your reduced payment and what the lender would otherwise collect at the full note rate. Once the buydown period ends, your rate adjusts to the standard rate locked in at origination — and stays there for the remainder of the loan.
It's worth noting that buydowns aren't the same thing as adjustable-rate mortgages. With a buydown, your note rate is fixed from day one. You're not taking on rate risk — you're simply front-loading some interest costs to make the early payments more manageable.
Temporary vs. Permanent Buydowns
Before diving into costs, it helps to understand the two main categories: temporary buydowns and permanent buydowns.
A temporary buydown reduces your rate for a defined window — typically one, two, or three years — and is most commonly funded by the seller, builder, or lender as a concession. A permanent buydown, often called discount points, reduces your rate for the entire loan term and is typically paid by the borrower at closing. Each point equals 1% of the loan amount and generally lowers your rate by approximately 0.25%, though this varies by lender and market conditions.
The right choice depends on your timeline and priorities. If you plan to stay in the home long-term and have the cash available, paying points can save you significantly over time. If you're buying in a higher-rate environment and expect to refinance in a few years, a temporary buydown funded by seller concessions might be the more practical move.
How Temporary Buydowns Work: The 1-0, 2-1, and 3-2-1 Structures
Temporary buydowns follow a straightforward naming convention that tells you exactly how much your rate is reduced and for how long.
A 1-0 buydown reduces your interest rate by 1% for the first year only, after which it returns to the note rate for the remaining term. This is the simplest and most affordable buydown structure.
A 2-1 buydown drops your rate by 2% in year one and 1% in year two. In year three and beyond, you pay the full note rate. This structure has become especially popular when sellers or builders are offering concessions, as it provides meaningful short-term relief without an enormous upfront cost.
A 3-2-1 buydown takes the same concept one step further, reducing your rate by 3% in year one, 2% in year two, and 1% in year three before returning to the note rate. This is the most expensive of the three structures because it requires the largest escrow deposit to cover the greater payment differential over a longer period.
How Much Does It Actually Cost to Buy Down a Rate?
The cost to buy down a mortgage interest rate is determined by the total payment differential over the buydown period — that is, the sum of what your payment would have been at the note rate minus what you actually pay each month during the reduced-rate years.
Here's how the math works in practice. Say your loan is $400,000 with a note rate of 7%. Your principal and interest payment at that rate is approximately $2,661 per month. With a 1-0 buydown, your rate for year one drops to 6%, bringing your monthly payment to roughly $2,398. The monthly difference is about $263. Multiply that by 12 months, and the cost of the 1-0 buydown is approximately $3,156.
For a 2-1 buydown on that same loan, you'd add the year-one differential to the year-two differential. At 5%, your payment would be approximately $2,147 — a monthly savings of $514. Year one differential: $6,168. Year two (at 6%): $3,156. Total cost of the 2-1 buydown: roughly $9,324.
These costs are typically covered by a seller credit, builder incentive, or lender concession — not out of your own pocket. That's an important distinction. When a seller offers a rate buydown instead of a price reduction, those funds go into a dedicated escrow account that pays down the interest subsidy each month. If you sell or refinance before the buydown period ends, any remaining funds in the escrow account are typically applied to your loan payoff.
Who Pays for the Buydown?
In most cases, temporary buydowns are funded by someone other than the buyer. Sellers who need to move a property in a slow market will often offer a 2-1 buydown as a more compelling incentive than a simple price cut — because it directly lowers the buyer's monthly payment in a visible, tangible way. Builders frequently use buydowns as a sales tool when interest rates are elevated. Some lenders also offer lender-paid temporary buydowns as part of specific loan programs.
Borrower-paid buydowns do exist, but they're less common for the temporary variety. If you're considering paying for a buydown yourself, it's worth comparing that cost against simply paying discount points or making a larger down payment — all three will lower your monthly obligation. Still, they do so differently and with different break-even timelines.
Five Things to Know Before Using a Rate Buydown
There are a few key limitations to understand before you factor a buydown into your purchase strategy.
First, temporary buydowns are generally available only on primary residence purchases. Investment property and second home buyers typically don't qualify.
Second, you must qualify for the loan at the note rate, not the buydown rate. Lenders underwrite your debt-to-income ratio based on the full payment you'll owe once the buydown period ends — not the reduced payment you'll enjoy in year one or two. This is an important protection for borrowers and ensures you won't be caught off guard when the rate adjusts back.
Third, buydowns are available across most major loan types — Conventional, FHA, VA, USDA, and Jumbo — though the specific terms and funding rules vary. For example, borrower-paid buydowns are generally restricted to certain loan types on conventional financing.
Fourth, the maximum buydown period is typically three years, though lender policies and loan type may further limit this.
Fifth, there are caps on how much a seller, builder, or lender can contribute toward a buydown. These limits are tied to the loan type and down payment amount and fall under broader seller concession guidelines set by Fannie Mae, Freddie Mac, and the government agencies.
Permanent Buydowns: When Paying Points Makes Sense
Paying discount points is a different calculation entirely. Because points reduce your rate for the life of the loan, the question isn't whether you'll save money — it's how long it takes to break even. If you pay $4,000 in points to lower your monthly payment by $80, your break-even point is 50 months, or just over four years. If you stay in the home longer than that, you come out ahead. If you sell or refinance before then, you've overpaid.
For buyers who are confident in their long-term plans and want to minimize the total interest paid over time, paying points is a proven strategy. For buyers with tighter cash-to-close budgets or shorter expected timelines, it often makes more sense to keep that money liquid.
Is a Rate Buydown the Right Move for You?
Rate buydowns work best when they solve a real problem: the monthly payment at today's rates is higher than you're comfortable with, and there's either a seller willing to fund the concession or a lender program available to bridge the gap. They're particularly effective in purchase markets where sellers have more flexibility to negotiate and where buyers expect rates to decline enough to refinance before the buydown expires.
That said, a buydown isn't a fix for an overextended budget. Because lenders qualify you at the note rate, you'll need to be comfortable with that payment eventually. The buydown gives you a runway — time to build equity, increase your income, or wait for refinancing conditions to improve.
The most effective way to evaluate a buydown is to run the actual numbers on your specific loan amount, rate, and concession. A mortgage professional who takes the time to walk through the math with you — not just hand you a one-size-fits-all answer — is the kind of guidance that actually moves the needle.
Flagstone Mortgage is a Houston-based mortgage broker with over 85 combined years of lending experience. Our team specializes in helping buyers understand all their financing options — including rate buydowns — so you can make a confident, informed decision. Ready to talk through your options? Get in touch with our team today.