A mortgage rate buydown is a strategy where you pay discount points upfront to reduce your interest rate for the life of the loan. One point costs 1% of the loan amount and typically reduces your rate by about 0.25%. There are also temporary buydowns like the 2-1 buydown where the rate is reduced for the first two years.
Buydowns make sense when you plan to stay in the home long enough to recover the upfront cost through lower monthly payments.
How Permanent Rate Buydowns Work
You pay an upfront fee — called discount points — to lower your interest rate permanently. Each point costs 1% of your loan amount. On a $400,000 loan, one point costs $4,000 and reduces the rate by roughly 0.25%. Your monthly payment drops by about $60 per month.
The breakeven point is approximately 5.5 years. If you stay in the home longer than that, you save money. If you sell or refinance before breakeven, you lose the upfront cost.
How to Calculate If Points Are Worth It
The math is straightforward:
The Breakeven Formula
Upfront cost / Monthly savings = Months to breakeven
Then divide by 12 to get years.
Example: $4,000 cost / $60 monthly savings = 66.7 months = 5.5 years.
If breakeven is 5.5 years and you plan to stay 8+ years, points are a good investment. If you plan to move or refinance in 3 years, skip the points.
Temporary Buydowns — The 2-1 and 3-2-1
A 2-1 buydown reduces your rate by 2% in year one and 1% in year two, then returns to the full rate starting in year three. A 3-2-1 buydown reduces by 3% in year one, 2% in year two, and 1% in year three.
The upfront cost is deposited into an escrow account that subsidizes your lower payments during those early years. These are popular with builders offering incentives and with sellers contributing to closing costs.
Who Pays for a Buydown?
The buyer, the seller, or the builder can pay for discount points. In the current market, sellers and builders sometimes offer rate buydowns as incentives. This is essentially a seller concession applied to your rate instead of your closing costs.
Buydown vs Lender Credits — Opposite Strategies
Points and lender credits are mirror images of each other:
- Points (buydown): Pay more upfront, get a lower rate. Best for long-term holders.
- Lender credits: Accept a slightly higher rate, get money back at closing. Best for short-term owners or those tight on cash.
When a Buydown Makes Sense
- You plan to stay in the home 7+ years
- You have extra cash that will not deplete your emergency fund
- The math shows clear savings over your expected holding period
- A builder or seller is offering to pay for it
When to Skip the Buydown
- You plan to sell or refinance within 5 years
- The points would eat into your down payment or reserves
- You could invest that money at a higher return elsewhere
- Your breakeven period exceeds your planned homeownership timeline