How to buy down an interest rate on a mortgage

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If you're looking to save money on your monthly payment or on overall interest, an interest rate buydown may be the answer. A buydown allows you to pay a fee when you close on your mortgage in exchange for a lower interest rate. You can buy down interest rates on a mortgage for a specific period or for the entire loan term.

Here’s a closer look at how buydowns work, how much they cost, the pros and cons, and the limitations.

Key takeaways:

• Buying down an interest rate involves paying an upfront fee at closing - often called discount points – in exchange for a reduced mortgage interest rate.
• Permanent buydowns lower your interest rate for the life of the loan, whereas temporary buydowns lower your rate for the first few years only.
• Calculating your break-even point can help you determine whether buying down a rate makes financial sense based on how long you plan to keep the home.

What does it mean to buy down an interest rate?

A buydown is a way for a mortgage borrower to reduce their loan's interest rate by paying an extra fee at closing. This can help get you a more affordable monthly payment and save on interest.

Depending on your financial goals, you can choose to buy down your interest rate permanently across the entire 15- or 30-year loan term or structure a temporary buydown that lowers your payments for the first 1 to 3 years after moving in.

What are discount points?

The most common buydown option is discount points, also referred to as mortgage points or prepaid interest points. When you buy points, you pay a one-time fee at closing in exchange for a lower mortgage interest rate. Buying discount points lowers your interest rate evenly for the entire life of your loan, resulting in lower monthly payments from your first check through your final payment.

One discount point equals 1% of your total loan amount. For example, purchasing 1 discount point on a $300,000 mortgage costs $3,000 at closing. The amount that your interest rate is reduced by per point will vary depending on the lender.

Discount points vs. a temporary buydown

With discount points, pay fees upfront to reduce your interest rate permanently for the life of the loan. The buyer typically pays for these points at closing.

If you choose a temporary buydown, upfront funds are placed into an escrow account to subsidize your interest rate for the first 1, 2, or 3 years of the mortgage. Sellers or home builders frequently fund temporary buydowns as a sales incentive.

Permanent buydown vs. temporary buydown

Understanding the differences between permanent and temporary buydowns allows you to pick the structure that best matches your long-term housing plans.

Permanent buydown

A permanent buydown is where you buy discount points to lower your interest rate for the full life of the loan. Purchasing 1 discount point (1% of the loan amount) typically reduces a fixed mortgage interest rate by 0.25%, though this can vary depending on the lender.

A permanent buydown is commonly chosen by buyers seeking to lower their monthly payment and save on interest. Because you’re buying to permanently reduce your interest rate, this option makes the most sense for owners playing to stay in the home for a long time. 

Temporary buydown

A temporary buydown reduces your interest rate for a short initial period. The most popular structure is a 2-1 buydown, where your interest rate is 2% lower in year one and 1% lower in year two. Starting in year three, the rate steps up to the permanent, full contract rate for the remainder of the loan. Temporary buydowns make homeownership more manageable in the first few years when buyers face moving expenses, furniture costs, or initial home maintenance.

How much does it cost to buy down an interest rate?

A mortgage point typically costs 1% of your loan amount and reduces your interest rate by 0.25%.

For example, if you take out a mortgage for $400,000 and you’re initially offered an interest rate of 4.0%, buying 1 point for $4,000 would reduce your interest rate to 3.75% and lower your monthly mortgage payment.

Points often can be bought in fractional amounts, so you could buy a half point for 0.5% of the loan amount and reduce your rate by 0.125%.

Cost of 1 Point = Loan Amount × 0.01

Average Interest Rate Reduction = 0.25% per point

Who can pay for a mortgage buydown?

Although it’s the home buyer who benefits from a buydown, sellers and builders also can buy points to attract home buyers:

Buyers

Most permanent buydowns are negotiated directly between the buyer and their mortgage lender.

Sellers

Sellers may offer to buy down a buyer’s mortgage to attract offers. To cover this expense, the seller often will add the buydown cost to the purchase price.

“Always remember that seller-funded buydowns typically provide more value than equivalent price reductions on a home for sale,” says Robert Shepherd, CEO of Peak & Home Partners in Rockville, Maryland.

Builders

A home builder also can buy down points to appeal to buyers. Typically, a builder will make an up-front payment to entice early buyers for a new-construction home. Once their communities are established, builders are usually less inclined to offer a buydown.

Lenders

Lenders also offer rate buydowns as a special deal, either as a temporary buydown effective at the beginning of the term or a permanent buydown for the life of the term.

How seller-funded buydown funds work at closing

When a seller or builder funds a temporary buydown, the full cost of the interest subsidy is calculated upfront and deposited into a dedicated, escrowed buydown account at closing. Each month during the temporary buydown phase, the loan servicer automatically pulls funds from this escrow account to supplement the buyer's reduced monthly payment.

How mortgage buydowns are structured

Since buydowns are negotiated, they can be arranged in multiple ways. Common structures include a 1-0 buydown, a 2-1 buydown, and a less-common 3-2-1 buydown.

1-0    buydown

With a temporary 1-0 buydown, your interest rate is reduced by 1% for the first year of payments.¹

Here's what that looks like for a 30-year fixed mortgage loan with a $300,000 loan amount at a contract rate of 7% interest.

1-1 buydown

A 1-1 buydown gets you a 1% rate reduction for the first two years of the mortgage before returning to the full note rate in year three. Here’s how that structure would look.

2-1 buydown

A 2-1 buydown features a rate that’s 2% lower for the first year of the loan and 1% lower in the second year, before settling into the permanent rate starting in the third year.

If you take advantage of this option, you will see the following payment structure and savings for the same sample loan mentioned above.

3-2-1 buydown

A 3-2-1 buydown reduces interest by 1% each year for the first 3 years.2 Using the same example of a $300,000 loan, 30-year amortized loan, the buyer would pay an interest rate of 4% in the first year, 5% in the second year, and 6% in the third year. Afterward, the rate would go back to the original 7%.

While the number of points charged for the buydown differs among lenders, the cost of the buydown is roughly equal to the amount the buyer would save in interest. In this case, the total cost of the buydown is $13,756.

Permanent evenly distributed rate reduction

Evenly distributed interest rate reductions using discount points permanently lower the loan's interest rate. This buydown doesn’t expire. So a buyer reduces their interest rate evenly and permanently over the loan’s entire term.

Using the same example above, the buyer would be expected to pay a monthly mortgage payment of $1,996 for a loan with no mortgage points applied.

Because the buyer would be lowering their interest payments for the entire life of the loan - instead of just 2 or 3 years - the total cost of the buydown would be higher.

“A permanent buydown is more expensive today but look at it as long-term savings equivalent to something like paying taxes in the future at a discount right now,” says Michigan-based personal finance expert Chad Silver.

How to calculate the break-even point

To determine if a buydown is worthwhile, calculate your break-even point. This figure is how long it’ll take to recoup the upfront cost of your buydown from your lower interest rate.

To figure out your break-even point, divide the cost of your buydown by the monthly savings.

Break-even point example

If you’re looking to get a 30-year, $300,000 mortgage with an interest rate of 7%, and your lender charges you 4 points to reduce your interest rate by 1%, you would first calculate the cost of the points.

Since each point costs 1% of the purchase price, the total cost would be $12,000. By paying 6% in interest instead of the standard 7%, your mortgage payments would drop from $1,996 to $1,799. Therefore, your monthly savings would be $197.

Dividing $12,000 by $197 comes to 61, so it would take you 5 years and 1 month for your savings to recoup the money you spent on discount points.

In this scenario, if you think there’s a chance you’d sell your home or refinance before the 61-month mark, a buydown would not make sense. Instead, consider making extra payments applied toward your principal balance, as you can also save money on interest by paying off your mortgage early.

Pros and cons of buying down a mortgage rate

Consider the benefits and drawbacks of buying down a mortgage rate to help determine if it’s the right move for you.

Pros of a mortgage buydown

• Lower interest rate and monthly payment: Your interest rate will be lower when you buy down a rate, so you’ll have a more affordable monthly payment.
•  More room in your budget: Since your monthly payments will be lower, more of your income will be available for other investments.
• Tax deductions: The cost of points can be deducted from your taxes, so if you itemize your deductions, you can save money.

Cons of a mortgage buydown

• High up-front cost: A buydown requires you to pay cash up front, which increases your closing costs.
• May not result in savings: If you sell the house before the break-even point, the monthly savings won't offset the up-front cost.
• Eventual larger monthly payments: Most rate buydowns are temporary. You may not be prepared when the discounted rate period ends and your monthly payment increases. You could end up struggling to make the increased payments.

Is it smart to buy down an interest rate?

Buydowns are most beneficial when a seller or builder pays the discount points without significantly increasing the purchase price. If you pay the points yourself, you’ll need to weigh the upfront costs against the potential savings.

When a buydown may make sense

A rate buydown can make good financial sense in the following circumstances:

• You plan to stay long-term: If you plan to remain in the property past your break-even point, a permanent buydown generates substantial lifetime interest savings.
• Seller or builder pays: If a seller or builder funds the buydown via seller concessions, you receive lower payments without tapping your own savings.
• Near-term income growth: A temporary buydown works well for buyers - such as medical residents or early-career professionals - who expect their earnings to increase before the temporary rate steps up.

“Buydowns make the most sense when you want lower payments early on, you expect income to increase soon, you are purchasing in a high-rate environment, or a seller or builder is offering concessions,” Shepherd says.

When a buydown may not make sense

Here are some cases where paying more upfront for a lower interest rate won’t be worthwhile:

• Short-term ownership: If you plan to sell the property or move within a few years, you risk not reaching your break-even point.
• Anticipated refinancing³: If broader market interest rates are expected to fall soon and you might refinance, paying upfront points is risky because you may not have recouped what you spent on points.
• Draining emergency savings: Paying for discount points out-of-pocket is unwise if it depletes your post-closing cash reserves.

Alternatives to buying down a mortgage rate

If buying down a rate does not fit your budget, here are some other ways you can potentially lower your interest rate.

• Make a larger down payment: Putting more cash toward your down payment reduces your total loan amount and can help you score a lower interest rate.
• Apply extra payments to principal: Making additional principal payments over time reduces total interest costs without requiring upfront points fees at closing.
• Explore a float-down option: If market rates drop while your loan is in underwriting, a float-down agreement lets you lock in lower rates before closing.

Limits to buying down interest rates

Buydowns are typically only available when buying or refinancing your primary residence or second home. Borrowers need to qualify for a mortgage at the standard interest rate with zero points to buy down the loan.

• Investment properties: Real estate transactions that involve investment properties or cash-out refinances usually are ineligible for buydowns.
• Mortgage type: You typically can buy down points on a refinance for conventional loans.
• Interest rate type:  Buydowns typically apply to fixed-rate mortgages. Adjustable-rate mortgages (ARMs) can be eligible for buydowns if they have a fixed introductory rate for at least 3 years.
• Cash-out refinances: Cash-out refinances are ineligible for temporary buydowns, but you may be able to buy points depending on your lender.

FAQ

Here are the answers to some frequently asked questions about mortgage buydowns.

Can you buy down your interest rate by 2%?

Yes, you can buy down an interest rate by 2% either permanently using 8 discount points or temporarily with a 2-1 buydown. Keep in mind most lenders cap the amount of points you can buy.

Can you buy down the interest rate on an existing mortgage?

You cannot buy down the rate on your existing mortgage. If you want to change the rate on your existing mortgage, you’ll need to refinance.

What is the difference between a buydown and discount points?

Discount points are the specific mechanism used to permanently buy down an interest rate for the entire loan term. "Buydown" is an umbrella term that encompasses both permanent discount points and temporary step-up structures.

The bottom line: Buydowns can reduce your mortgage payment

Mortgage buydowns allow buyers to reduce their monthly mortgage payments, either permanently or for the first few years of their loan term. Buying down an interest rate is an effective strategy to lower your monthly mortgage payment and reduce long-term borrowing costs. The value depends on upfront cost, monthly savings, break-even timing, and how long you expect to keep the home. If you’re interested in a buydown, calculate your break-even point to ensure you'll recoup the points you paid.

You can explore competitive rates offered by Rocket Mortgage and consider applying for a home loan today.

¹ With the 1-0 temporary buydown, eligible clients will receive a 1% rate reduction below the note rate for the first year of the loan. Offer valid only on retail purchase loans for primary or secondary residences. Not valid on Jumbo, Self-Employed Assist, or Team Member loans. This offer cannot be combined with any other discounts or retroactively applied to previously locked or closed loans. Rocket Mortgage reserves the right to modify/cancel this offer. Additional conditions apply. This is not a commitment to lend.

² Clients may elect a 3-2-1 temporary buydown through seller concessions, home builder credits, and from real estate agent concession, but never more than two sources. With a 3-2-1 temporary buydown, clients may purchase an effective rate reduction of 3% in year one, 2% in year two, and 1% in year three. This product offering is only available on fixed-rate mortgages. Offer valid only on retail purchase loans for Fannie Mae, Freddie Mac, Jumbo Smart (fixed rate only), and VA products. Not available on FHA, cash‑out, rate‑and‑term refinances, or Texas 50(a)(6) loans. Eligible contributors include the seller, builder (if also the seller or agent), real estate agent, and correspondent lender. Client‑earned agent commissions cannot be used. Wholesale brokers and clients cannot fund buydowns. All contributions must meet Seller Concession/Interested Party guidelines. Relocation subsidies cannot be combined with a temporary buydown. Rocket Mortgage may modify product eligibility and criteria at any time. Additional conditions apply. This is not a commitment to lend.

³ Refinancing may increase finance charges over the life of the loan.