Is an Interest Rate Buydown Right for You?

A mortgage buydown is a financing technique where an upfront payment is made to a lender to reduce the interest rate on a loan, either temporarily or for the entire term. This is a popular strategy to lower monthly payments.

By paying "points" (each point is 1% of the loan amount) at closing, you prepay interest. This payment is given to the lender in exchange for a lower interest rate, which results in a lower monthly mortgage payment.

A temporary buydown reduces the rate for a short period (e.g., a 2-1 buydown reduces the rate for the first two years). A permanent buydown, which our calculator focuses on, reduces the interest rate for the entire life of the loan.

A buydown is worth it if you plan to stay in the home long enough to pass the "break-even point"—the point where your total savings from the lower rate exceed the upfront cost. Our interest rate buydown calculator is designed to give you a clear answer to this question.

The homebuyer, the seller, or even the builder can pay for the buydown. A seller-paid buydown is a powerful negotiating tool and a common concession in real estate deals. If you're considering this, talk to our financing experts about how to structure the offer.

The cost is measured in "points." One point equals 1% of the loan amount. The number of points required to lower the rate by a certain amount (e.g., 0.25%) varies by lender and daily market conditions.

A 2-1 buydown is a popular type of temporary buydown. The interest rate is reduced by 2% for the first year and 1% for the second year. In the third year, the rate returns to the original fixed rate. This is great for buyers who expect their income to rise.

Yes, points paid on a mortgage for a primary residence are generally tax-deductible in the year they are paid. It's always best to consult with a tax advisor for details specific to your financial situation.

Yes, lenders have limits on "seller concessions," which includes buydowns. These limits depend on the loan type (Conventional, FHA, VA) and the buyer's down payment percentage. A loan officer can provide specific details.

A larger down payment reduces your loan amount and may help you avoid Private Mortgage Insurance (PMI). A buydown reduces your interest rate and monthly payment. The better choice depends on your goals: lowering your total loan balance vs. improving your monthly cash flow.

A buydown is generally a bad idea if you plan to sell the home or refinance before you reach the break-even point calculated by our tool. In that scenario, you would lose money on the upfront cost.

You can include a request for seller concessions to cover the buydown cost in your purchase offer. Your real estate agent and mortgage advisor can help you frame this as a win-win for both you and the seller.

For permanent buydowns, you qualify based on the lower, bought-down interest rate. This can sometimes help you qualify for a slightly larger loan amount because your projected monthly payment is lower.

Buydowns are available for most common loan types, including conventional, FHA, and VA loans. However, availability and specific rules can vary by lender, so it's important to inquire early in the process.

If you refinance before the break-even point, you will not have saved enough in interest payments to cover the initial cost of the buydown. This would result in a net financial loss on the buydown transaction itself.

High inflation can make a buydown more attractive. By securing a lower fixed monthly payment, you create more certainty and predictability in your budget at a time when other costs are rising.

The cost of points for a specific rate reduction is set by the lender based on the bond market. However, you can and should shop around with different lenders, as they may offer different rates and buydown costs.

A lender credit is the opposite of a buydown. The lender gives you a credit to help cover closing costs in exchange for you accepting a *higher* interest rate. It's a trade-off between upfront cash and a higher monthly payment.

Typically, the cost of the buydown (the points) must be paid in cash at closing and cannot be rolled into the loan amount itself. It is considered part of your closing costs.

A qualified mortgage advisor can provide personalized advice based on your specific financial situation and goals. The experts at Jaken Finance Group are ready to help you analyze your options. Contact us today!