A mortgage buydown is an upfront payment that lowers your interest rate, either temporarily for the first one to three years of the loan or permanently for the full term. The money can come from you, the seller, or a homebuilder, and it either sits in a custodial account that subsidizes your early payments or buys down the rate outright through discount points. Which structure makes sense depends on how long you plan to stay in the home, whether your income is likely to rise, and who is willing to fund the cost.
Temporary Buydowns and How the Rate Steps Up
A temporary buydown lowers your rate for the first few years, then increases it by no more than one percentage point per year until it reaches the full note rate.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans Three structures are common:
- A 2-1 buydown drops the rate 2 points in year one, 1 point in year two, then settles at the note rate in year three.
- A 3-2-1 buydown drops 3 points, 2 points, and 1 point across the first three years before returning to the full rate in year four.
- A 1-0 buydown drops the rate 1 point for year one only, then reverts.
At closing, the buydown funds go into a custodial account. Each month, the servicer withdraws enough to cover the difference between your reduced payment and the payment owed at the full note rate. On a $300,000 loan with a 7% note rate and a 2-1 buydown, you pay as if the rate were 5% in year one and 6% in year two, with the account covering the gap. From year three on, you pay the full 7%.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
Temporary buydowns are available on fixed-rate conventional, VA, and FHA purchase loans. Fannie Mae caps the rate reduction at 3 percentage points and the buydown period at three years, and restricts temporary buydowns on adjustable-rate mortgages.2Fannie Mae. Temporary Interest Rate Buydowns
Permanent Buydowns Using Discount Points
A permanent buydown uses discount points to reduce the rate for the entire life of the loan. One point costs 1% of the loan amount and typically shaves about 0.25 percentage points off the rate.3Freddie Mac. What You Need to Know About Discount Points On a $300,000 mortgage, one point costs $3,000. Two points cost $6,000 and drop a 7% rate to roughly 6.5%.
Points are paid at closing, and the lower rate is locked in from your first payment. The math that decides whether it’s worth it is the break-even: divide the cost of the points by the monthly savings. If one point costs $3,000 and lowers your payment by $50, you break even at 60 months. Sell or refinance before then, and the points cost more than they saved. Stay past the break-even, and the rest is savings.
You Still Have to Qualify at the Full Rate
A temporary buydown does not help you qualify for a bigger loan. Lenders qualify borrowers based on the full note rate, not the reduced starting rate.2Fannie Mae. Temporary Interest Rate Buydowns VA lenders use the post-buydown payment as well.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans Your debt-to-income ratio has to support the full payment from day one.
This is because the mortgage note itself doesn’t change. The note reflects the permanent rate and payment; the buydown just subsidizes the early months.2Fannie Mae. Temporary Interest Rate Buydowns If you’re already stretching, a buydown won’t expand what you can borrow.
Who Pays for It
Buydown funds can come from the buyer, the seller, or a builder. Each loan program limits what the seller and other interested parties can contribute.
For conventional loans backed by Fannie Mae, seller contribution caps depend on the loan-to-value ratio:
- Up to 3% of the purchase price if LTV is above 90%.
- Up to 6% if LTV is between 75.01% and 90%.
- Up to 9% if LTV is 75% or below.
These caps cover all interested-party contributions combined, so any seller credit toward other closing costs eats into the same limit.4Fannie Mae. Interested Party Contributions (IPCs)
FHA loans allow seller concessions of up to 6% of the sale price regardless of the down payment. VA loans cap seller concessions at 4% of the home’s reasonable value, and temporary buydown funds count toward that limit.5U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs
Homebuilders often offer temporary buydowns as sales incentives when rates are high and inventory is slow to move, funding the custodial account as part of the purchase agreement. Buyers can also fund a buydown out of pocket when the long-term savings justify the upfront cost.
What Happens If You Sell or Refinance Early
With a temporary buydown, unused funds don’t vanish. Under Fannie Mae guidelines, remaining custodial funds are credited toward the mortgage payoff, or returned to the borrower or lender depending on what the buydown agreement specifies.2Fannie Mae. Temporary Interest Rate Buydowns VA rules require any remaining funds to be applied to the outstanding balance at full payoff, foreclosure, or short sale.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans If someone assumes the loan, the subsidy continues on the original schedule.
Discount points work differently. There’s no account and nothing to refund. You bought a lower rate, and the benefit ends when the loan does. Sell or refinance before the break-even point, and you won’t recover what you spent.
Buydown or Larger Down Payment
If you have extra cash, the choice is between buying down the rate and putting more down. A larger down payment shrinks the loan itself, which lowers every payment for the whole term and can eliminate private mortgage insurance once you reach 20% equity. A buydown leaves the loan amount alone and reduces the interest rate instead.
A temporary buydown delivers the biggest monthly savings in the first year or two, then nothing after. A larger down payment produces smaller monthly savings but never expires and builds equity from day one. The right call depends on the loan size, the rate environment, and how long you expect to stay.
Tax Treatment of Discount Points
The IRS treats discount points as prepaid interest. If you meet a set of requirements, you can deduct the full cost of the points in the year you paid them. The loan has to be secured by your main home and used to buy, build, or improve it; paying points has to be a standard practice in your area; and you must have provided funds at or before closing at least equal to the points charged.6Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction If you don’t meet all the conditions, you deduct the points proportionally over the life of the loan.
If the seller paid your points, you can still deduct them as though you paid them yourself, but you have to reduce your home’s cost basis by the same amount.6Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction A lower basis can mean a larger taxable gain when you sell. Points paid on a home equity loan or line of credit that isn’t used to buy, build, or improve the home aren’t deductible.