Rate buydowns

Two different tools

A temporary buydown puts money into an escrow account at closing. Each month that account covers the gap between a reduced payment and the real one. On a 2-1, your rate is 2% lower in year one and 1% lower in year two, then the full note rate from year three on. A 3-2-1 does the same over three years; a 1-0 lowers the rate by 1% for the first year only. The note rate never changes; only who's paying part of it for a while.

A permanent buydown is discount points. Money paid at closing buys a lower note rate for the entire 30 years. The payment relief is smaller per month, but it never expires.

What each one costs

A temporary buydown costs exactly what it subsidizes. On a $520,000 loan at 6.75%, a 2-1 buydown costs roughly $12,000; a 3-2-1 about $24,000. The money isn't lost: whatever hasn't been used when you refinance or sell is credited to your payoff.

A permanent buydown is priced by the market and changes daily. As a rough rule, one point (1% of the loan amount) lowers the rate by about a quarter percent, but the relationship isn't linear and it moves with the bond market. On that same $520,000 loan, $24,000 in points might lower the rate by roughly 1%, worth around $340 a month for as long as you keep the loan.

How to choose

The question is how long you'll keep the loan and what the money is for.

Temporary wins when you expect to refinance or sell within a few years, your income is about to rise, or you need breathing room while you furnish the house and absorb a new payment. It front-loads the benefit where it matters most.

Permanent wins when you'll hold the loan a long time and rates aren't likely to drop enough to justify a refinance. The break-even is typically four to six years; past that, the permanent buydown keeps paying and the temporary one is long gone.

A price reduction usually loses to both. The same seller money as a price cut barely moves the payment. I ran the numbers on all three, and the gap surprises people.

What to know

Who pays matters for the math. Seller- and builder-paid buydowns are a concession, limited by loan program (3 to 9% of the price depending on the loan and down payment). Buyer-paid points on a purchase are usually tax-deductible in the year paid; check with your tax preparer.

You still qualify at the full rate. Lenders allow temporary buydowns because the loan is safe regardless of the subsidy. Don't buy a house you can only afford in year one.

Both can be combined. Seller money can buy the rate down permanently and a buyer can add a temporary buydown on top, or the reverse. On the right file it's the strongest structure available.