Interest rates

A buydown is when someone pays extra money at closing to reduce your interest rate for a certain period of time. There are two main types: 1. Temporary Buydowns (most common today) These lower your rate for the first 1–3 years of the loan. Examples: 2‑1 Buydown - Year 1: rate is 2% lower - Year 2: rate is 1% lower - Year 3–30: back to the full rate 3‑2‑1 Buydown - Year 1: 3% lower - Year 2: 2% lower - Year 3: 1% lower - Year 4–30: full rate These are often paid for by: - The seller - The builder - Sometimes the lender - Occasionally the buyer Purpose: Make the first few years more affordable while you settle in or wait for rates to drop. 2. Permanent Buydowns (discount points) This is where you pay discount points to permanently lower your interest rate for the entire life of the loan. - 1 point = 1% of the loan amount - Typically lowers your rate by about 0.25% Example: On a $400,000 loan: - 1 point = $4,000 - Might reduce your rate from 6.5% → 6.25% This is best for buyers planning to stay long‑term. Why People Use Buydowns Temporary buydowns help with: - High interest rate environments - Easing into payments - First‑time buyers - Sellers wanting to attract more buyers - Builders trying to move inventory Permanent buydowns help with: - Lowering monthly payments forever - Reducing total interest paid - Improving debt‑to‑income ratios - Qualifying for a higher loan amount What You Should Watch Out For - After the temporary buydown ends, your payment jumps to the full rate - You need to be comfortable with the Year 3 payment - If you plan to refinance soon, a permanent buydown may not be worth it - Not all lenders structure buydowns the same way Bottom Line A mortgage interest rate buydown is a tool to make your payment cheaper — either temporarily or permanently — by paying upfront to lower the interest rate. It’s not a gimmick, but it needs to be used strategically.

Simply put, it is a prepayment of interest to the bank reducing the payment of the loan for a short period of time.

A mortgage interest rate buydown is a financing strategy where you (or someone on your behalf) pay money upfront to reduce the interest rate on a home loan—either temporarily or permanently. If you’re thinking like an operator, here’s the clean breakdown: 1) Permanent Buydown (Discount Points) You pay upfront at closing to lower the rate for the entire life of the loan. Example: Pay 1 point (1% of the loan amount) → reduce rate ~0.25% (varies by lender) Outcome: Lower monthly payment for 30 years This is a math decision, not an emotional one: If you’re not holding the property long enough, you lose money You need to calculate the break-even point (how many months until savings exceed upfront cost)