How Interest Rate Buydowns Actually Work

"Rate buydown" gets used loosely. There are really two different tools, and knowing which one you're being offered matters.

Temporary buydowns (the 2-1, the 3-2-1)

A temporary buydown lowers your rate for the first year or two, then steps up to the full note rate. A 2-1 buydown means year one is two points lower, year two is one point lower, year three onward is the real rate. It's often paid for by a motivated seller or builder. Great if you expect income to rise or plan to refinance — but you must qualify at the full rate.

Permanent buydowns (paying points)

Here you pay discount points up front to lower the rate for the entire loan. One point is one percent of the loan amount. The question is the break-even: divide the cost by the monthly savings. If you'll stay past the break-even month, it pays off.

The rule of thumb

Have someone else fund a temporary buydown when you can. Only pay for a permanent buydown with your own cash if you're confident you'll hold the loan long enough to recover it.