Definition
Paying money up front, usually at closing, to lower a mortgage's interest rate. A permanent buydown uses discount points to reduce the rate for the life of the loan. A temporary buydown, such as a 2-1 buydown, lowers the rate for the first year or two and then steps up to the full note rate, and is often funded by the seller or builder as an incentive.
Why it matters
A permanent buydown is a bet that you will keep the loan long enough for the monthly savings to repay the upfront cost. A temporary one eases the first years but requires being able to afford the full payment when it resets, and the money funding it might have been a bigger price cut instead.
Example
On a $400,000 loan at 7%, the payment is about $2,661. A seller-funded 2-1 buydown sets the rate at 5% in year one (about $2,147) and 6% in year two (about $2,398) before the full $2,661 in year three, costing the seller roughly $9,300 in total. Alternatively, paying two discount points, $8,000, might permanently cut the rate to 6.5% and the payment to about $2,528, saving $133 a month and breaking even in about five years.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.