What Is a Mortgage Buydown?

A mortgage buydown is when the buyer (or sometimes the seller or builder) pays an upfront fee to reduce the interest rate on a loan. This fee is typically paid at closing in the form of discount points.

Each discount point usually costs 1% of the loan amount and can reduce the interest rate by a set amount, often around 0.25%, depending on the lender and market conditions.

How Buying Points Works: An Example

Let’s look at a simple example to see how a buydown can work in practice.

Imagine a buyer purchasing a home for $500,000 with a $100,000 down payment. That leaves a loan amount of $400,000. The lender offers a 30-year fixed mortgage with an interest rate of 3.75%.

If the buyer chooses to purchase one discount point:

• Cost of one point: 1% of $400,000 = $4,000

• Interest rate reduction: approximately 0.25%

By paying $4,000 upfront, the buyer lowers their interest rate to 3.50%, reducing their monthly payment and saving on interest—especially in the early years of the loan, when most payments go toward interest.

Who Pays for the Buydown?

While buyers often pay for discount points themselves, buydowns don’t always have to come out of the buyer’s pocket. In some cases:

• Sellers may offer to pay points as a concession to make their home more attractive

• Builders frequently use buydowns as an incentive on new construction homes

This strategy is more common in a buyer’s market, where sellers are motivated to stand out and close deals.

What Is a 3-2-1 Buydown?

A 3-2-1 buydown is a temporary interest rate reduction that lowers the buyer’s rate during the first three years of the loan.

Here’s how it works:

• Year 1: Interest rate is reduced by 0.75%

• Year 2: Interest rate is reduced by 0.50%

• Year 3: Interest rate is reduced by 0.25%

• Year 4 and beyond: Interest rate returns to the original note rate

A similar option, known as a 2-1 buydown, reduces the rate for the first two years before returning to the standard rate in year three.

These temporary buydowns can be especially helpful for buyers who expect their income to increase or plan to refinance in the future.

Is a Mortgage Buydown Right for You?

A buydown can be a powerful tool—but it isn’t right for everyone. It may make sense if you:

• Plan to stay in the home long enough to recoup the upfront cost

• Want lower payments during the early years of homeownership

• Can negotiate seller or builder-paid incentives

Speaking with a mortgage professional can help you evaluate whether a permanent or temporary buydown aligns with your financial goals.

Final Thoughts

Mortgage buydowns offer flexibility for buyers looking to reduce their interest rate and monthly payment. Whether through discount points or a temporary buydown like a 3-2-1, understanding your options can help you make a more informed and confident homebuying decision.