A mortgage rate buydown is an upfront payment, made at closing, that lowers the interest rate on a home loan. The lower rate can last for the whole loan (a permanent buydown, also called discount points) or for the first one to three years (a temporary buydown, such as a 2-1).
Who foots the bill?
The buyer, the seller, a builder, or a lender can pay for it. Buyers use a buydown to reduce their monthly payment, and sellers often offer one as a concession instead of lowering the price.
This guide explains how each type works, walks through two examples with the math, and covers what buyers and sellers each need to know. It applies to homes across Central Texas, including Dripping Springs and Driftwood. But keep in mind that if you are outside of Texas this may work differently in your area. If you need a referral for an outstanding agent in where you live or are interested in buying please get in touch, I have a wide network of amazing agents through the Nation Mastermind groups I participate in, I’ll introduce you to at least two for your to interview.
As I write this in Mid-October 2026 the current rate on a 30yr fixed rate mortgage is 7.37%. Many people expected rates to go down this year from the 6.4%’s of 2025. Those that were want–to-be-buyers at that time are now priced out of many markets, including the neighborhoods they have already fallen in love with.
Rate buydown basics
What it is: a lump sum paid at closing in exchange for a lower interest rate.
Two types: permanent (discount points) and temporary (2-1, 1-0, 3-2-1).
Who can pay: the buyer, the seller, a builder or developer, or a lender through a higher rate or fees.
Where the money goes: to the lender at closing, either to lower the rate for the life of the loan or to fund an account that covers the payment difference during the buydown period.
What it changes: the interest rate and monthly principal and interest payment. It does not change the purchase price or the loan amount.
What is a mortgage rate buydown?
A rate buydown trades cash now for a lower interest rate. The lender receives the payment at closing and, in return, charges a lower rate than it would otherwise offer. Because the payment is part of the closing costs, it appears on the Closing Disclosure along with other loan costs.
What are the basic types of rate buydowns?
Permanent buydown (discount points): one point costs 1% of the loan amount and typically lowers the rate by a fraction of a percent. The lower rate applies for the full loan term.
Temporary buydown: the rate is reduced for the first one to three years, then returns to the original note rate. A 2-1 buydown lowers the rate by 2% in year one and 1% in year two. A 1-0 buydown lowers it by 1% in year one only. A 3-2-1 buydown steps down over three years.
Example of a permanent buydown (discount points):
A buyer borrows $400,000 on a 30-year fixed loan at a quoted rate of 6.5%. The principal and interest payment is about $2,528 per month.
The lender offers one discount point. One point is 1% of the loan, or $4,000, paid at closing. In exchange, the rate drops to 6.25%.
New payment at 6.25%: about $2,463 per month
Monthly savings: about $65
Break-even point: $4,000 divided by $65 is roughly 61 months, or just over 5 years
If the buyer keeps the loan longer than about five years, the savings exceed the cost. If the home is sold or the loan is refinanced sooner, part of the upfront payment is never recovered. How much one point lowers the rate varies by lender, loan type, and day, so the exact figure should come from a written quote.
Example of a temporary 2-1 buydown:
The same loan: $400,000 at a note rate of 6.5%. With a 2-1 buydown, the rate is 2% lower in year one and 1% lower in year two, then returns to the note rate in year three.
Year 1 at 4.5%: about $2,027 per month
Year 2 at 5.5%: about $2,271 per month
Years 3 through 30 at 6.5%: about $2,528 per month
Compared with the full payment, the buyer saves about $502 per month in year one (roughly $6,018) and about $257 per month in year two (roughly $3,085). The total is about $9,100, and that is the cost of the buydown.
The $9,100 is paid at closing and held in an escrow account. Each month, the account covers the difference between the reduced payment and the full payment, so the lender still receives the full amount. The buyer's lower payment is pre-funded, not forgiven.
What BUYERS should know about rate buydowns
Qualification: with a temporary buydown, lenders generally qualify the buyer at the full note rate, not the reduced rate. Confirm this with the lender.
Time horizon: permanent buydowns reward long ownership. The break-even point in Example 1 is just over five years.
Cash flow: temporary buydowns give the most relief in the first year or two, which can help during a move, a job change, or while waiting to refinance.
Refinancing or selling early: what happens to unused buydown funds depends on the loan program and lender. Ask before closing.
Compare options: request a Loan Estimate showing the rate and costs with and without the buydown.
What SELLERS should know about rate buydowns
It works as a concession: a seller can agree to pay a set dollar amount toward the buyer's buydown instead of reducing the sale price.
The sale price stays the same: a concession does not lower the recorded sale price, while a price reduction does. Some sellers prefer this when comparable sales matter to them.
The cost is fixed: the seller's contribution is a known amount credited at closing, with no ongoing obligation after the sale.
Net proceeds: a concession and a price reduction of the same amount can leave a similar net, though a lower price may slightly reduce costs that are calculated as a percentage of price. Comparing both on a net sheet shows the difference.
Appraisal: a buydown does not change the appraised value. The contract price still needs to be supported by the appraisal.
Limits apply: total seller contributions are capped by the buyer's loan program (see below).
How much can a seller contribute to a buydown?
Seller contributions, also called interested party contributions, are capped as a percentage of the purchase price. Current limits by loan type:
Conventional, primary or second home, less than 10% down: 3%
Conventional, 10% to 24.99% down: 6%
Conventional, 25% or more down: 9%
Conventional, investment property: 2%
FHA: 6% (of the lesser of price or appraised value)
USDA: 6%
VA: 4% plus customary closing costs
These contributions can cover closing costs, prepaid items, and discount points, but not the buyer's down payment. Guidelines change, and jumbo loans follow investor-specific rules, so the lender should confirm the limit for a specific loan.
Rate buydown vs. price reduction: which is better?
Using the loan in the examples, the same $9,100 produces different results depending on how it is applied:
As a 2-1 buydown: the payment drops about $502 per month in year one and about $257 per month in year two, then returns to the full payment year 3 and beyond (unless refinanced)
As a price reduction: the loan balance falls by $9,100, which lowers the payment by about $58 per month for the entire loan term.
As discount points: $9,100 buys roughly 2.3 points, which lowers the rate for the whole loan. The size of the drop depends on the lender's pricing that day. Your lender will do this math for you as needed.
A temporary buydown front-loads the savings. A price reduction spreads smaller savings across the full term and also lowers the amount borrowed. The better fit depends on how long the buyer expects to keep the loan, when cash flow is tightest, and what the seller is willing to offer.
Frequently asked questions about rate buydowns
How much does a rate buydown cost?
One discount point costs 1% of the loan amount. A temporary buydown costs the total payment difference over the buydown period, which was about $9,100 in the 2-1 example.
Does a buydown lower the rate for the whole loan?
A permanent buydown does. A temporary buydown lowers the rate only for the first one to three years.
Can a seller pay for a buyer's rate buydown?
Yes, within the concession limits for the buyer's loan type. The credit is written into the purchase contract and applied at closing.
Do buyers qualify at the reduced rate?
Generally no. With a temporary buydown, lenders typically qualify the buyer at the full note rate.
How long does it take to break even on discount points?
Divide the cost of the points by the monthly savings. In Example 1, $4,000 divided by $65 is about 61 months.
Is a rate buydown worth it?
It depends on how long the buyer will keep the loan, who is paying, and what the alternative use of the money would be, such as a price reduction or a larger down payment.