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Mortgage Rate Buydowns: How They Help Buyers Afford Homes and Sellers Attract Offers

A “temporary buydown" is a strategy some sellers, builders and lenders use to reduce a buyer’s monthly mortgage payments during the first few years of the loan term, helping make the purchase more affordable.

Robin Rothstein
Chris Jennings
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If you’re a home buyer looking for ways to whittle down your mortgage rate — or a seller hoping to attract more interest — a temporary buydown, also called a mortgage rate buydown, could be worth considering.
This arrangement — a key sales incentive often used by home builders — can help buyers ease into homeownership by reducing costs during the first few years of their loan term, while giving sellers a competitive edge.
But rate buydowns aren’t available in every situation and they come with some tradeoffs.

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What is a mortgage rate buydown?

A mortgage rate buydown temporarily reduces a home buyer's interest rate in the first year, or sometimes in the first two or three years. Instead of making the mortgage's full monthly payments from the get-go, the home buyer makes discounted payments for a year or more.
Temporary buydowns are often paid for by home builders to help buyers with affordability. However sellers and lenders may also offer mortgage buydowns to help close the deal, especially in a high-rate environment.
» MORE: See where mortgage rates are heading

How do mortgage buydowns work?

The fee for the temporary buydown is a closing cost paid for by the seller, builder or lender that’s equal to the buyer's interest savings. The buydown funds go into an escrow account and are applied to the buyer’s monthly mortgage payments for the duration of the temporary buydown period.
Buydowns can last as little as one year or as long as three, allowing borrowers to extend their savings. There are several buydown options, but here’s an overview of the more popular types:
  • 3-2-1 buydown: Lasts three years, with the interest rate reduced by three percentage points in the first year, two percentage points in the second year and one percentage point in the third year.
  • 2-1 buydown: Reduces your interest rate by two percentage points in the first year, then by one percentage point in the second year, before rising to the full rate after that.
  • 1-1 buydown: Reduces your rate by one percentage point for the first two years of your mortgage.
  • 1-0 buydown: Reduces your rate by one percentage point for the first year of your mortgage and then returns to your original rate in year two.

3-2-1 mortgage buydown scenario

This example shows the kind of substantial savings that can result from a 3-2-1 mortgage buydown:
  • Loan amount: $350,000
  • Loan term: 30 years
  • Original interest rate: 6.25%
Loan year
Interest rate
Monthly principal & interest payment
Monthly buydown savings
Total annual savings
Year 1
3.25%
$1,523.22
$631.79
$7,581.48
Year 2
4.25%
$1,721.79
$429.22
$5,150.64
Year 3
5.25%
$1,932.71
$222.30
$2,667.60
Year 4+
6.25%
$2,155.01
$0
$0
Total buydown interest savings: $15,399.72

Mortgage buydown: Buyer pros and cons

While a mortgage buydown sounds like a no-brainer for the buyer, this strategy has its share of advantages and disadvantages.
Pros
Cons
Allows borrowers to temporarily take advantage of a lower interest rate
Shock of higher payments after buydown period ends
Lowers your monthly mortgage payments for one to three years
Full monthly payment amount may be higher than you can afford, putting you at risk of default
Provides extra cash flow for new homeownership purchases like furniture, appliances and repairs
Not all sellers, builders or lenders offer buydowns
» MORE: How to lower your monthly mortgage payment

Mortgage buydown: Seller pros and cons

A mortgage buydown can be a useful sales tool for sellers, especially in a high-rate or buyer-leaning market. That said, this strategy may fall short in some situations.
Pros
Cons
Potentially makes a listing more attractive, especially when a home is languishing on the market
Requires sizable upfront costs to cover prepaid interest
Many builders offer them to improve affordability for newly built homes
The upfront costs reduce the profit a seller nets from the sale
Allows the seller to avoid cutting the list price to maintain the property’s value
Certain property and loan types may not allow mortgage buydowns

Negotiating a buydown

Either side can suggest a buydown: The seller, builder or lender can offer one proactively, as a competitive tactic, or the buyer can request one as a concession.
First, the lender must qualify the borrower at the full interest rate, which requires the lender to determine that the borrower can afford to repay the loan after the rate reductions have run out.
Government-sponsored mortgage companies Fannie Mae and Freddie Mac impose limits on seller concessions, including temporary buydowns.
Fannie and Freddie also restrict temporary buydowns to a maximum of three years. And to soften payment shock, the effective interest rate can go up only one percentage point each year. So the borrower's effective rate can't jump from 5% to 7%; it would have to go from 5% to 6% for a year before settling at 7%.

How buydowns differ from ARMs

A temporary buydown appears to resemble an adjustable-rate mortgage (ARM) because the borrower starts out making payments at one interest rate and later makes payments at another interest rate.
However, a buydown is not an ARM. Among the key differences is what happens with the interest rates:
  • On an ARM, the interest rate and the monthly payments fluctuate periodically for at least a portion of the loan term. 
  • With a buydown, the fundamental interest rate never changes. Instead, you receive a discounted interest rate while the seller, builder or lender pays part of your interest payments in the first one to three years of the loan. Once the buydown period ends, you pay the original rate for the remainder of the loan term.
One argument in favor of ARMs over mortgage buydowns is that they last longer and can result in greater savings — at least during the introductory period when ARM rates are fixed and typically lower than fixed-rate mortgages.
Once that introductory period ends, though, rates become adjustable and could therefore increase based on market conditions — potentially reducing interest savings.
A buydown offers more predictability than an ARM, which can be helpful with budget planning. However, if you’d rather lower your interest rate through an ARM, you’ll need to apply for the loan, as builders and sellers don’t offer ARMs as a concession.

How buydowns differ from discount points

Unlike a mortgage buydown, which is a temporary rate reduction, paying discount points is a way to permanently reduce your interest rate — and, in turn, your monthly payments. Sellers can pay discount points as a sales incentive.
With discount points, you can typically expect:
  • Lower monthly savings. Paying one discount point — equal to 1% of the loan amount — typically reduces the interest rate by about one-quarter of a percentage point.
  • Substantial cumulative savings over several years.
  • Making between four and eight years of regular payments for the accumulated savings to break even with the upfront cost.
If you sell or refinance before reaching the break-even point on the upfront costs of the discount points, you won’t benefit from any interest savings.
In contrast, the buyer's savings from a temporary buydown equal the seller's upfront cost in one to three years.
» MORE: Mortgage points calculator

Is a mortgage buydown the right move?

Whether or not a mortgage buydown makes sense comes down to your financial priorities and timeline. While it can be appealing to have someone subsidize your interest costs early on, remember that this is a short-term benefit. Once the mortgage buydown period ends, you’ll be on the hook for your full, original interest rate — and a higher monthly payment.
If you’re looking for a longer runway of predictable lower payments, a 5/1 ARM may offer more breathing room. These loans provide a fixed rate for five years instead of just one to three. But that tradeoff comes with uncertainty. You’ll need to be prepared to refinance before the fixed period ends or accept the risk of future adjustments that could erode your interest savings.
On the other hand, if long-term rate stability is what you value most and can afford the upfront costs, buying mortgage discount points may be the better strategy, especially if you plan to stay in your home long enough to benefit from the interest savings.
» MORE: How to get the best mortgage rate
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