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  • Writer's pictureJesse Passafiume

What Is a Rate Buydown and How Does it work?

Updated: Mar 12

One of the best ways to counteract higher rates is to buy down your interest rate. There are two primary buydown types that most homeowners employ. Permanent Buydown A permanent buydown means you pay a one-time cost to lower your interest rate and monthly payment for the life of a loan. Does it make sense for your purchase? Your Loan Officer will help you determine how long it will take to recapture the cost and begin seeing the benefit of a lower rate. Temporary Buydown Another option is to lower your monthly payment temporarily. This option is great for individuals who have increasing income, believe they can refinance in the next three years, or want to free up some monthly cash so they can paint. The most popular product is the Seller-Paid 2/1 Buy Down. This program lowers your rate and payment temporarily. For a 2/1 Buy Down, your rate is 2% lower in year one and 1% year lower in year two. Then, years 3-30 finish up at your base rate. The great news is that this is still a fixed-rate mortgage with predictable payments. Who pays for it, and how much does it cost? We encourage buyers to negotiate seller credits to cover buydown costs. However, sometimes it makes sense for buyers to pay for the buydown as part of their closing process. Working with your loan team to understand the cost-benefit analysis and determine the right option for you is critical. Buying your rate down is not right for every buyer or every market. With rates trending up and sellers willing to negotiate, it may be a great time to take advantage of these financial tools.

Happy House Hunting!


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