What This Calculator Does
A temporary buydown lowers your interest rate for the first few years of the loan before it steps back up to the full, permanent contract rate. The funds are typically deposited into an escrow account at closing, often paid by the home seller or builder as an incentive. A permanent buydown uses discount points paid at closing to lower the rate for the entire loan.
How It Works
3-2-1: the rate is reduced by 3% in year one, 2% in year two and 1% in year three, reaching the standard rate in year four. 2-1: reduced by 2% in year one and 1% in year two, the most common structure. 1-1: reduced by 1% for each of the first two years. 1-0: reduced by 1% for the first year only. Permanent: one discount point typically costs 1% of the loan amount and lowers the rate by an amount that depends on the lender.
Why It Matters
A temporary buydown eases payments in the early years, while a permanent buydown is best for buyers who plan to stay long-term and want to maximize total interest savings. Seeing both side by side shows what each option costs and saves.
Choose a buydown
Loan amount: $400,000.00
2-1 temporary buydown
| Year | Rate | Monthly P&I | Monthly savings | Annual savings |
|---|---|---|---|---|
| 1 | 5.000% | $2,147.29 | $513.92 | $6,167.08 |
| 2 | 6.000% | $2,398.20 | $263.01 | $3,156.09 |
| 3+ | 7.000% | $2,661.21 | $0.00 | $0.00 |
These funds are typically deposited into escrow at closing and are often paid by the seller or builder as an incentive.
Savings, if any, vary based on consumer credit profile, interest rate availability, and other factors.
Default rates: Federal Reserve Economic Data (FRED), Freddie Mac Primary Mortgage Market Survey
How Mortgage Buydown Is Calculated
3-2-1: the rate is reduced by 3% in year one, 2% in year two and 1% in year three, reaching the standard rate in year four. 2-1: reduced by 2% in year one and 1% in year two, the most common structure. 1-1: reduced by 1% for each of the first two years. 1-0: reduced by 1% for the first year only. Permanent: one discount point typically costs 1% of the loan amount and lowers the rate by an amount that depends on the lender.
Key Takeaways
- •The cost of a temporary buydown equals the total payment savings during the reduced-rate years
- •Ask whether the seller or builder will fund the buydown as a closing incentive
- •Permanent buydowns pay off only if you keep the loan past the break-even point
- •Confirm with your lender how much each discount point lowers your rate
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