Rate buy-downs got popular as rates climbed, and buyers ask me about them constantly. The key is understanding the difference between a temporary buy-down and a permanent one — they solve different problems and cost different amounts.
Two different tools
Both buy-downs cost money upfront to lower your rate, but they work on different timelines. A temporary buy-down gives you a lower rate for a short period before it steps up. A permanent buy-down lowers the rate for the life of the loan. Knowing which problem you are solving guides the choice.
How a temporary buy-down works
A common example is a 2-1 buy-down: your rate is 2% lower in year one, 1% lower in year two, then settles at the full note rate from year three on. The cost is typically funded upfront, sometimes by the seller or builder, and held in escrow to subsidize the early payments.
How a permanent buy-down works
A permanent buy-down uses discount points — each point is a percentage of the loan amount paid upfront — to lower the rate for the entire term. You pay more at closing in exchange for a lower payment every month you hold the loan.
When temporary makes sense
- You expect your income to rise soon.
- A seller or builder offers to fund the buy-down.
- You want lower payments while you settle in.
- You may refinance later if rates fall.
When permanent makes sense
A permanent buy-down can pay off if you will keep the loan long enough for the monthly savings to exceed the upfront cost — similar to the break-even math on points. If you might move or refinance soon, the upfront cost may not be recovered.
Questions to ask
- Who is paying for the buy-down?
- What happens when a temporary buy-down expires?
- What is the break-even on a permanent buy-down?
- How long do I plan to keep this loan?
Frequently Asked Questions
What is a mortgage rate buy-down?
A rate buy-down lowers your mortgage interest rate by paying money upfront. A temporary buy-down reduces your rate for the first year or two before it rises to the note rate, while a permanent buy-down uses discount points to lower the rate for the entire loan term. Each solves a different problem.
How does a 2-1 buy-down work?
With a 2-1 temporary buy-down, your interest rate is 2% lower in year one, 1% lower in year two, then settles at the full note rate from year three onward. The cost is funded upfront, often by a seller or builder, and held in escrow to subsidize your early payments. Confirm terms with a lender.
What is a permanent rate buy-down?
A permanent buy-down uses discount points — each point being a percentage of the loan amount paid upfront — to lower your interest rate for the entire loan term. You pay more at closing in exchange for a lower monthly payment for as long as you keep the loan. It works like buying down with points.
Is a temporary or permanent buy-down better?
It depends. A temporary buy-down suits buyers expecting rising income or a future refinance, and it is attractive when a seller or builder funds it. A permanent buy-down suits buyers who will keep the loan long enough to recover the upfront cost through monthly savings. Match the tool to your plans.
What happens when a temporary buy-down expires?
Your rate rises to the full note rate, and your payment increases accordingly. With a 2-1 buy-down, this happens in year three. It is important to be confident you can afford the higher payment after the buy-down ends. Plan for the step-up rather than relying on refinancing being available.
Who pays for a rate buy-down?
Buy-downs can be paid by the buyer, or funded by a seller or builder as an incentive, especially temporary buy-downs. Builder-funded buy-downs are common in new construction. Who pays affects whether the buy-down is worthwhile for you. Clarify the source and cost with your lender and in your offer.
