A rate buydown temporarily reduces your interest rate for the first 1-3 years of the loan. They're back in 2026 as sellers offer incentives to move properties.
I'm Bill McCoy (CA DRE #01212512). I structure buydowns regularly. Here's how they work and when they make sense.
How a Buydown Works
Example: 2-1 Buydown on a 6.5% rate
- Year 1: 4.5% (2% below actual)
- Year 2: 5.5% (1% below actual)
- Year 3-30: 6.5% (actual rate)
Your payment is lower at the start, then gradually increases.
Types of Buydowns
2-1 Buydown (most common): Year 1 is 2% below note rate, Year 2 is 1% below, Years 3-30 are full rate.
1-0 Buydown: Year 1 is 1% below note rate, Years 2-30 are full rate.
Permanent Buydown (discount points): Pay upfront to permanently lower your rate. Roughly 1 point (1% of loan amount) = 0.25% rate reduction.
What Does a Buydown Cost?
2-1 Buydown on a $500,000 loan at 6.5%:
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- Payment at 6.5%: $3,160/month
- Payment at 4.5% (year 1): $2,533/month — saves $627/month ($7,524/year)
- Payment at 5.5% (year 2): $2,839/month — saves $321/month ($3,852/year)
- Total savings: ~$11,376
That full amount is pre-funded at closing.
Who Pays?
Seller-paid (most common in slow markets). Seller credits ~$11K at closing to fund the buydown. Sellers prefer this to dropping the price because it doesn't lower comps or appraisal values.
Buyer-paid. You fund it yourself — makes sense if you expect income to rise in 1-2 years and want lower payments now.
Builder-paid. New construction builders frequently offer buydowns to move inventory. Typical pitch: "6.5% rate OR 4.5% with builder-paid 2-1 buydown."
When Buydowns Make Sense
- Seller-paid in a buyer's market — free money, take it
- Your income will increase soon — new job, spouse returning to work
- You're stretching to afford the payment — lower payments in years 1-2 ease you into ownership
- You plan to refinance within 2 years — if rates drop, you'll refi before year 3 anyway
When They Don't
- You can easily afford the full payment already
- You're planning to sell within 2-3 years
- A price reduction would serve you better — run the numbers both ways
Temporary vs. Permanent
| Feature | Temporary (2-1) | Permanent (Points) |
|---|---|---|
| Rate reduction | Years 1-2 | Life of loan |
| Payment | Increases over time | Fixed |
| Best for | Short-term relief | Long-term savings |
Permanent buydown break-even example: $500,000 loan, 6.5% to 6.0% costs 2 points ($10,000). Monthly savings: $150. Break-even: 67 months (5.5 years). Pay points if you'll stay 7+ years. Skip them if you might sell or refi within 5.
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Stacking Buydowns with Seller Concessions
Max seller concessions: Conventional 3-9% (depends on down payment), FHA 6%, VA 4%.
You can stack: 2-1 buydown ($11K) + closing cost credit ($8K) + prepaid taxes/insurance ($3K) = $22K total seller credit (within program limits).
Quick Answers
You qualify at the actual rate (6.5%), not the subsidized rate. If you refinance in year 1, you lose the remaining benefit — it's non-refundable. Buydowns work on conventional, FHA, VA, and jumbo loans. You can negotiate a buydown after you're under contract through an addendum.
Better Offers Inc | CA DRE #01212512