Rate buydowns come in both temporary and permanent forms, and which one you have depends entirely on how the deal is structured. A temporary buydown lowers your monthly payment for the first one to three years using a subsidy account, but the interest rate written into your promissory note never changes. A permanent buydown, bought with discount points at closing, reduces the rate on the note itself for the entire life of the loan. The two look similar on a monthly payment schedule in year one, but they behave very differently after that, and they carry different consequences if you refinance, sell, or run the numbers for taxes.
How a Temporary Buydown Works
A temporary buydown lowers your effective interest rate for a set number of years at the start of the mortgage. The funding comes from a lump sum deposited into a separate escrow account at closing. Each month during the buydown period, the servicer draws from that account to cover the gap between what you pay and what the full note rate requires. The money can come from the seller, builder, lender, your employer, or you as the borrower, though seller-funded buydowns are the most common.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
The three structures you’ll see most often are:
- 2-1 buydown: your effective rate is two percentage points below the note rate in year one, one point below in year two, and reaches the full note rate in year three.
- 3-2-1 buydown: your effective rate starts three points below the note rate and steps up by one point each year, reaching the full rate in year four.2Federal Housing Finance Agency Office of Inspector General. Temporary Interest Rate Buydowns Dashboard
- 1-0 buydown: your effective rate is one point below the note rate for the first year only, then adjusts to the full rate in year two.
None of these arrangements change the interest rate on your promissory note. The note rate stays the same for the full term; the subsidy just covers part of your payment during the buydown window. Once the escrow funds are exhausted, you pay the full amount with no further assistance.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
One catch worth knowing about: the FHFA Office of Inspector General found that loans with buydown agreements often carry slightly higher note rates than comparable loans without. In one analysis of Fannie Mae and Freddie Mac activity, buydown loans carried note rates roughly 0.06 percentage points higher than non-buydown loans.2Federal Housing Finance Agency Office of Inspector General. Temporary Interest Rate Buydowns Dashboard Once the buydown period ends, you may be paying slightly more each month than you would have on a plain loan.
Temporary buydowns are generally limited to fixed-rate mortgages. Fannie Mae restricts them on adjustable-rate loans, and the VA allows them only on fixed-rate products.3Fannie Mae. Temporary Interest Rate Buydowns
How a Permanent Buydown Works
A permanent buydown works through discount points paid to the lender at closing. In exchange for that upfront fee, the lender writes a lower interest rate directly into your promissory note. That reduced rate stays in effect for the entire life of the loan, whether that’s 15, 20, or 30 years. One discount point costs 1% of your loan amount and typically reduces your rate by about 0.25%, though the exact reduction varies by lender and market.4Internal Revenue Service. Topic No. 504, Home Mortgage Points
On a $400,000 mortgage, one point costs $4,000. Two points would cost $8,000 and might reduce your rate by roughly half a percentage point. Unlike a temporary buydown, the lower rate here is the actual contract rate, not a subsidy masking a higher one. Every monthly payment for the life of the loan reflects the reduced rate, and the amortization schedule is built around it from day one.
The Break-Even Calculation
The important question with discount points is whether you’ll keep the loan long enough to recoup the upfront cost. Divide the total cost of the points by the monthly payment savings they create. The result is the number of months it takes to break even.
Say you pay $4,000 for one point and it saves you $65 a month. Your break-even point is about 62 months, just over five years. Sell, refinance, or pay off the mortgage before then, and you lose money on the points. Stay past that mark, and every additional month is pure savings. Borrowers who plan to stay put for many years benefit most; those who may move or refinance within a few years often come out behind.
The Differences That Actually Affect You
How Lenders Qualify You
This detail catches many buyers off guard. For temporary buydowns, Fannie Mae requires lenders to qualify you at the full note rate, not the lower bought-down rate you’ll actually pay in the early years.5Fannie Mae. Qualifying Payment Requirements A temporary buydown does not help you qualify for a larger loan. Your debt-to-income ratio is measured against the payment you’ll owe after the buydown expires.
Permanent buydowns work the opposite way. Because discount points genuinely lower the rate on the note, the lender qualifies you at the reduced rate. Even a small rate reduction changes your monthly payment and your debt-to-income ratio, which can matter for how much you’re approved to borrow.
What Happens If You Refinance or Sell Early
If you refinance or sell while a temporary buydown is still active, the remaining funds in the subsidy escrow account don’t just vanish. Under Fannie Mae guidelines, those funds are either credited toward your loan payoff or returned to you or the lender, depending on what the buydown agreement specifies.3Fannie Mae. Temporary Interest Rate Buydowns If the home is sold and the buyer assumes the mortgage, the funds may continue to be used under the original terms. In foreclosure, they go toward reducing the mortgage debt.
Permanent discount points offer no refund. The money you paid at closing bought a lower rate, and that rate applies for as long as the loan exists. Pay it off early through a sale, refinance, or lump-sum payment, and the remaining interest savings you would have earned over the full term are simply forfeited. If you refinance at month 30 but your break-even point was month 62, you spent $4,000 and only recovered about $1,950 in savings.
Tax Treatment
Discount points paid on a mortgage for your primary home are generally deductible as mortgage interest in the year you pay them, provided you meet several IRS conditions. The loan must be secured by your main home, paying points must be standard practice in your area, the amount can’t exceed what’s typically charged locally, and you must have provided enough of your own funds at or before closing to cover the points.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Points paid on a refinance follow different rules. You generally spread the deduction over the life of the new loan rather than deducting the full amount in the year paid. An exception applies if part of the refinance goes toward substantially improving your main home; the portion of points tied to that improvement may be deductible in the year paid.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
If the seller pays discount points on your behalf, you can still treat them as if you paid them yourself and deduct them under the same rules. You must, however, reduce your home’s cost basis by the amount of the seller-paid points, which could increase your taxable gain when you sell.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Deducting points only helps if you itemize. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your total itemized deductions don’t exceed that, the tax benefit of paying points is effectively zero.
Temporary buydown subsidies funded by the seller are treated differently. The IRS instructs lenders not to report seller-paid buydown interest on Form 1098, and sellers typically treat these payments as a selling expense rather than mortgage interest passed through to the buyer.8Internal Revenue Service. Instructions for Form 1098
Which One Fits Your Situation
A temporary buydown works best when you expect income to rise in the near future and want lower payments while you settle in, or when a seller is offering a buydown concession as an incentive so the cost comes from their proceeds rather than yours. Just remember: because you still qualify and ultimately pay at the full note rate, a temporary buydown doesn’t reduce your long-term interest cost at all. Once the subsidy runs out, your payment is the same as if the buydown never existed.
A permanent buydown through discount points is a better fit if you plan to stay in the home well past the break-even point and want to lock in lower payments for the life of the loan. The savings compound, and the reduced rate lowers both your monthly payment and the total interest you’ll pay over 15 or 30 years. The trade-off is a larger cash outlay at closing with no refund if plans change. Weigh whether you would actually benefit from the tax deduction, how long you realistically expect to keep the mortgage, and whether that upfront cash might do more work as a larger down payment, which could lower your loan-to-value ratio, eliminate private mortgage insurance, or shrink the balance the rate applies to in the first place.