A rate buydown is a way to use someone else’s money, usually the seller’s (by way of a credit), to lower your mortgage payment. There are two kinds, they do different things, and the wrong one can cost you more than it saves. Here is the math on a $1.165 million Sylmar purchase, labeled so you can see which numbers are real and which are assumptions.
Two kinds of buydown
Temporary (2-1). You qualify at the current rate. Year one, your payment is calculated 2 points below it; year two, 1 point below; year three onward, the full rate you qualified for. If rates drop below your qualified rate along the way, you can refinance if it makes sense. The buydown can be paid by you up front if the math works, or from a seller credit you negotiate during escrow. But don’t count on the latter, because you don’t know what that would look like until after inspections.
Permanent (discount points). You pay the lender a fee at closing, and the note rate itself is lower for the life of the loan. One point is 1% of the loan amount and typically buys about 0.25% off the rate, though lenders price this differently week to week.
The Sylmar deal
| Location | Sylmar |
| Price | $1,165,000 |
| Seller credit covered | A temporary 2-1 buydown, plus the remaining $5,000 toward HVAC ductwork after asbestos was found at inspection |
One negotiated seller credit covered both. Part of it funded the 2-1 buydown; the remaining $5,000 went toward replacing the HVAC ductwork after asbestos was found at inspection. The buydown addressed the payment. The ductwork credit addressed a documented, priced repair.
What the payments look like (illustrative)
The loan’s actual note rate and the buydown’s actual cost are not published here. The table below uses labeled assumptions so you can see how the structure works: 20% down, a $932,000 loan, 30-year fixed, and an assumed 6.50% note rate. Principal and interest only; taxes, insurance, and HOA are on top.
Temporary 2-1 buydown
| Year | Payment calculated at | Monthly P&I | vs. full rate |
|---|---|---|---|
| Year 1 | 4.50% | $4,722 | −$1,169/mo |
| Year 2 | 5.50% | $5,292 | −$599/mo |
| Year 3 onward | 6.50% (your qualified rate) | $5,891 | — |
Permanent buydown
| Structure | Note rate | Monthly P&I | vs. full rate |
|---|---|---|---|
| Rate bought down for the life of the loan | 6.00% | $5,588 | −$303/mo, every month |
Under these assumptions the 2-1 subsidy totals about $21,200 over two years ($14,023 in year one, $7,189 in year two). That is what the seller would fund. The permanent buydown saves $303 a month for as long as you hold the loan; its cost depends on the lender’s pricing that week. At one point ($9,320) for 0.50%, it breaks even in about 31 months and is ahead every month after.
Which one to ask for
- Take the 2-1 if you expect to refinance or sell within three or four years, or your income is rising and year one is the tight year.
- Take the permanent buydown if you plan to hold the loan five years or more and rates are not obviously about to fall. $303 a month for a decade is $36,000.
- Take neither if the seller will give you the same dollars as a plain closing-cost credit and you are cash-constrained. Cash at closing beats a payment subsidy when you are writing a check for $200,000.
Questions buyers ask
Who pays for a 2-1 buydown?
Usually the seller, through a credit at closing. Some lenders and builders fund them as an incentive. The buyer can fund it too, but that rarely makes sense; you are prepaying your own payment.
Does a 2-1 buydown change my loan rate?
No. The note rate is fixed. The buydown is a prepaid subsidy that covers part of your payment for 24 months.
Do I qualify at the lower payment?
No. You qualify at the full note rate. The buydown helps cash flow, not approval.
Can a seller credit cover both a buydown and closing costs?
Yes, up to the lender’s cap on seller contributions, typically 3–9% of the price depending on your down payment. The buydown counts against that cap. To see where a buydown and the other charges show up on the paperwork, read the line-by-line closing costs.
Payment figures are illustrative and use the assumptions stated above, not the actual Sylmar loan terms. Transaction facts are from a purchase I represented as the buyer’s agent; no client names or addresses are published. Before writing an offer, request an Optics report on any home.
Leave a Reply