A permanent buydown uses discount points to lower your interest rate for the entire loan term. A temporary buydown (2-1 or 3-2-1) reduces your rate for the first 1-3 years only. Permanent buydowns are best for long-term owners who plan to stay 7+ years. Temporary buydowns work well for buyers who expect their income to grow or plan to refinance within a few years.
Permanent Buydown Explained
You pay discount points upfront to permanently reduce your interest rate. One point costs 1% of the loan amount and typically reduces the rate by 0.25%. The lower rate applies for the full life of the loan. On a $350,000 loan, one point costs $3,500 and saves about $55 per month permanently.
Temporary Buydown Explained
A 2-1 buydown reduces your rate by 2% in year one and 1% in year two, then returns to the full rate in year three. A 3-2-1 buydown reduces by 3%, 2%, and 1% over three years. The subsidy is deposited into an escrow account at closing and used to supplement your monthly payments during the reduced-rate period.
Comparison Table
| Permanent | Temporary | |
|---|---|---|
| Rate reduction duration | Full loan term | 1-3 years |
| Upfront cost | 1-3% of loan | 1-5% of loan |
| Best for | Long-term owners | Short-term / refinance soon |
| Refinance risk | Points lost if refinance early | Lower risk, shorter benefit period |
| Common use | Buyer pays points | Builder / seller incentive |
Cost Comparison
On a $350,000 loan, a permanent buydown of 1 point costs $3,500 and saves $55/month. Over 5 years that is $3,300 in savings -- almost breaking even. Over 10 years it is $6,600 in savings, netting $3,100.
A 2-1 temporary buydown on the same loan might cost $5,000-$7,000 and saves $300-$400/month in year one, $150-$200/month in year two, then nothing after.
When to Use Each
Permanent buydowns are ideal when you plan to keep the loan 7+ years, want predictable payments, and have cash available. Temporary buydowns work well when you expect income growth, plan to refinance in 2-3 years, or the builder/seller is paying for it.
