Mortgage Rate Buydowns Explained: Permanent vs. Temporary — Real Numbers on a $400,000 Loan

When interest rates are elevated, one of the most powerful tools available to homebuyers — and often paid for by sellers — is a mortgage rate buydown. But “buydown” means different things depending on the type. This guide breaks down permanent buydowns and temporary buydowns side by side using real numbers on a $400,000 loan so you can see exactly what each option costs and saves.

The Three Types of Rate Buydowns

Before diving into the numbers, it helps to understand what each type actually does:

• Permanent buydown — you pay discount points at closing to permanently lower your interest rate for the life of the loan
• Temporary buydown (2-1, 1-0, 3-2-1) — a lump sum is deposited into a buydown escrow at closing that subsidizes your payments for the first 1–3 years, after which the rate returns to the note rate

Both can be paid by the buyer, the seller, or the builder. In today’s market, negotiating a seller-paid buydown is one of the most effective ways to reduce your payment without the seller simply cutting the price.

The Loan Scenario Used in This Guide

All payments shown are principal & interest only. Taxes, insurance, HOA, and mortgage insurance are not included and will vary by property and borrower profile.

Part 1: Permanent Buydown — Pay Points, Lower Your Rate Forever

A permanent buydown means paying discount points at closing in exchange for a lower interest rate that lasts for the entire 30-year loan term. One point equals 1% of the loan amount. In this scenario, buying the rate down from 6.750% to 6.375% costs 1.375 points.

Side-by-Side Payment Comparison

Break-Even Analysis

The key question with a permanent buydown is always: how long until the monthly savings offset the upfront cost?

The permanent buydown verdict: If you plan to keep this loan beyond 4.6 years, paying 1.375 points to buy down to 6.375% is a net positive. If you plan to sell or refinance before then, the points may not be worth it. The longer you hold the loan, the better the return on the upfront investment.

Part 2: Temporary Buydowns — Lower Payments Now, Par Rate Later

A temporary buydown does not change your actual loan rate. Your note rate remains at 6.750% for the full 30 years. Instead, a lump sum — typically paid by the seller or builder — is deposited into a buydown escrow account. That escrow fund subsidizes the difference between your actual par payment and your reduced payment during the buydown period.

When the buydown period ends, your payment adjusts to the full par rate payment. There are no surprises — the schedule is fixed and disclosed at closing.

2-1 Buydown: Two Years of Reduced Payments

The most common temporary buydown in today’s market. Your payment is reduced for the first two years, then steps up to the par rate in year 3.

1-0 Buydown: One Year of Reduced Payments

3-2-1 Buydown: Three Years of Stepped Reductions

Less common today due to higher cost, but occasionally used by builders. Three years of stepped savings before returning to par.

Master Comparison: All Scenarios Side by Side

Which Buydown Strategy Makes the Most Sense?

Choose a Permanent Buydown If:

• You plan to keep the loan for more than 4–5 years
• You want a lower payment every month for the life of the loan
• You have cash available at closing or can negotiate seller-paid points
• You want to reduce your total interest cost over the long term

Choose a Temporary Buydown If:

• You expect to refinance within 2–3 years if rates drop
• Your income is growing and the higher payment will be comfortable later
• A seller or builder is offering a concession — a 2-1 buydown is often the most efficient use of seller credits
• You want the lowest possible payment right now to qualify or ease into homeownership
• You’re buying a new construction home (builders frequently offer 2-1 buydowns as incentives)

The Key Difference to Remember

A permanent buydown changes your actual interest rate. A temporary buydown does not — it only subsidizes your payments using an escrow fund. When that fund runs out, your payment returns to the full par rate. Understanding this distinction is critical before choosing which strategy fits your situation.

Can the Seller Pay for a Buydown?

Yes — and in today’s North Texas market, this is one of the most effective negotiating strategies available. Rather than asking a seller to reduce the purchase price by $9,000–$10,000 (which has a smaller monthly impact due to amortization), you can ask for a seller concession that funds a 2-1 buydown. The result is a dramatically lower payment in years 1 and 2 — exactly when many buyers need it most.

Seller concession limits vary by loan program — your loan officer can confirm the maximum for your specific scenario before you make an offer.

Want to Run These Numbers for Your Loan?

Every purchase scenario is different — your rate, loan amount, and how long you plan to stay all affect which buydown strategy makes the most sense. I can run a side-by-side comparison for your specific numbers and help you structure an offer that maximizes your purchasing power.

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All payment calculations are estimates based on a $400,000 loan amount, 30-year fixed term, and the interest rates noted. Payments shown are principal and interest only and do not include taxes, insurance, HOA, or mortgage insurance. Actual rates, payments, and buydown costs vary based on credit profile, loan program, lender, market conditions, and property details. This content is for educational purposes only and is not a commitment to lend. Wayne Wallace, NMLS #745186 • Homewood Mortgage, LLC • NMLS #294974.