A buydown is a mortgage financing technique where upfront money is paid at closing to reduce the interest rate on a home loan, either temporarily or permanently. The term comes from "buying down" the rate — paying more now to pay less each month. Buydowns can be funded by the buyer, the seller (as a concession to attract buyers), or the builder (as an incentive for new construction purchases).
Temporary buydowns are the most common type in today's market. A 2-1 buydown reduces the interest rate by 2% in the first year and 1% in the second year, after which it returns to the permanent rate. For example, if your permanent rate is 7%, you would pay 5% in year one, 6% in year two, and 7% from year three onward. On a $350,000 loan, this could save approximately $400/month in year one and $200/month in year two. A 3-2-1 buydown extends the graduated reduction over three years. The cost of a temporary buydown is typically 2% to 3% of the loan amount, deposited into an escrow account that subsidizes the payments during the reduced-rate period.
Permanent buydowns involve paying discount points at closing to secure a lower rate for the entire loan term. Each point costs 1% of the loan amount and typically reduces the rate by approximately 0.125% to 0.25%. For instance, paying 2 points ($7,000) on a $350,000 loan might reduce your rate from 7% to 6.5%, saving about $115 per month. Over a 30-year term, that's $41,400 in savings — a significant return on the initial investment. The breakeven point — when accumulated monthly savings equal the upfront cost — is typically 5 to 7 years for permanent buydowns.
Seller-funded buydowns have become particularly popular in markets with high interest rates. Instead of reducing the home price, the seller contributes funds toward a buydown — giving the buyer lower monthly payments while the seller maintains their sale price. This can be more effective than a price reduction because the buyer gets immediate monthly savings, and the property's recorded sale price stays higher (which benefits comparable sales in the neighborhood).
The cost of any buydown appears on the closing disclosure, clearly identifying who is paying and how the rate is affected. At Beycome Title, our settlement team ensures all buydown funds are properly collected and applied. Whether the buydown is paid by the buyer, seller, or builder, we coordinate the documentation so your closing costs are transparent and accurate. Use Beycome's mortgage calculator to compare payments with and without a buydown.