Rate buydowns let you pay upfront to lower your mortgage rate. But the math only works in specific situations.
How rate buydowns work
Pay points to lower your interest rate.
1 point = 1% of loan amount = typically lowers rate by 0.25%
Example:
- $500K loan
- 1 point = $5,000
- Rate drops from 7.0% to 6.75%
- Monthly savings: ~$65/month
Types of buydowns
Permanent buydown (standard)
You pay points, rate is lower for life of loan.
Example:
- Pay $10,000 in points
- Rate: 6.5% instead of 7.0%
- Save $130/month for 30 years
- Total savings: $46,800
Break-even: 77 months (6.4 years)
Temporary buydown (builder programs)
Builder pays to lower your rate temporarily.
2-1 buydown example:
- Year 1: 5.0% (builder subsidizes 2%)
- Year 2: 6.0% (builder subsidizes 1%)
- Year 3+: 7.0% (full rate)
After 2 years, your payment jumps. Used in new construction.
Break-even calculation
Formula:
Cost ÷ Monthly savings = Break-even months
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Example:
- Cost: $10,000
- Monthly savings: $150
- Break-even: 67 months (5.6 years)
Rule: If you're staying longer than break-even, buydown makes sense.
When permanent buydown works
✓ Staying 7+ years: Break-even recovers.
✓ Great rate today, not sure rates will drop: Lock it in.
✓ Have cash after closing: Can afford to invest $10K upfront.
✓ Rates are at multi-year highs: Buying down now protects against staying high.
When temporary buydown (2-1) works
Builder program scenario:
- Builder offers 2-1 buydown for $0
- You get lower payments years 1-2
- Easier to afford while settling in
- Year 3 payment jump is planned
Pros: Cash flow relief in early years
Cons: Payment shock in year 3
Real California examples
Example 1: Permanent buydown on jumbo
$1.5M loan:
- Rate without buydown: 7.25%
- Payment: $10,059/month
- Cost of 1 point: $15,000
- Rate with 1 point: 7.0%
- Payment: $9,975/month
- Monthly savings: $84
- Break-even: 179 months (14.9 years)
Verdict: Don't buydown on jumbo (break-even is too long).
Example 2: Permanent buydown on conforming
$600K loan:
- Rate without buydown: 6.75%
- Payment: $3,896/month
- Cost of 1 point: $6,000
- Rate with 1 point: 6.5%
- Payment: $3,791/month
- Monthly savings: $105
- Break-even: 57 months (4.75 years)
Verdict: Buy down if staying 5+ years.
Example 3: Temporary 2-1 buydown (builder)
$500K loan:
- Market rate: 7.0%
- Year 1 (with 2-1): 5.0% = $2,862/month
- Year 2 (with 2-1): 6.0% = $3,363/month
- Year 3+ (market): 7.0% = $3,713/month
Tradeoff: 2 years of $600+ lower payments, then $350 payment jump.
Good if: You're saving aggressively years 1-2 for year 3 increase.
When NOT to buydown
✗ Buying in expensive market, money is tight:
Don't spend $10K on points to save $100/month. You need liquidity.
✗ Planning to move/refinance soon:
If break-even exceeds your hold period, skip it.
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✗ Rates are already competitive:
Don't buydown at 6.5%—you've already got decent rate.
✗ Can't afford to pay points:
Use lender credits instead (take higher rate, get cost credit).
Lender credits (opposite of buydown)
Instead of paying points to lower rate, accept higher rate to get cost credit.
Example:
- Market rate: 6.75%
- Take 7.25% rate
- Get $6,000 lender credit toward closing costs
- No upfront payment needed
Tradeoff: Higher rate vs. lower cash-to-close.
Works when you're short on cash.
The math on 2.5% rate spread
$600K loan, 30-year:
- At 6.5%: $3,791/month
- At 7.0%: $3,996/month
- Difference: $205/month
- 30-year difference: $73,800
A 0.5% rate difference is significant over 30 years.
Bottom line
Permanent buydown:
- Works if staying 5+ years
- Calculate break-even (points ÷ monthly savings)
- Only buydown if break-even matches your timeline
Temporary 2-1 buydown:
- Good for builders' programs (free/subsidized)
- Plan for payment jump in year 3
General rule: Don't buydown points unless break-even is less than your hold period.
Ready to analyze if buydown makes sense for you? Get A Quote.
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