Mortgage Rate Buydowns: Points vs. a 2-1 Buydown, With Real Numbers

When rates are high, buyers and sellers look for creative ways to make the numbers work. Buydowns are one of the most useful tools I use in negotiations, but they’re also one of the most misunderstood. Here’s a clear look at both types.

Permanent buydown: paying points

One discount point costs 1% of your loan amount. In exchange, the lender lowers your rate. How much each point buys varies by lender and by the market on the day you lock, so always compare quotes side by side.

Here’s an example. On a $600,000 loan, a 7.00% rate has a principal and interest payment of about $3,992. If one point, or $6,000, drops the rate to 6.75%, the payment falls to about $3,892, a savings of roughly $100 a month. Your break-even is about 60 months, or five years.

If you expect to keep the loan longer than that, points can pay off. If you might sell or refinance sooner, they usually don’t.

Temporary buydown: the 2-1

With a 2-1 buydown, your rate is 2 points lower in year one and 1 point lower in year two. From year three on, you pay the full note rate. The cost is the total payment difference, set aside upfront in an account.

Year	Rate	Payment on $600,000	Monthly savings
1	5.00%	$3,221	$771
2	6.00%	$3,597	$395
3 to 30	7.00%	$3,992	$0

The cost here is about $13,985: twelve months of $771 plus twelve months of $395. If rates fall and you refinance early, unused funds are often applied to your loan, but check the terms with your lender.

Which one is better?

Situation	Often the better fit
You plan to keep the loan 6 or more years	Permanent points
You expect rates to fall and plan to refinance	A 2-1 buydown or no points
Your income is rising, such as a new job or promotion	2-1 buydown
You need the lowest payment you qualify for	Permanent points

Lender credits: points in reverse

Lenders can also go the other way. If you accept a slightly higher rate, the lender may give you a credit toward closing costs. This makes sense when cash is tight at closing or when you expect to refinance soon. It’s the mirror image of buying points: you save cash today and pay a bit more each month.

The best choice depends on how long you’ll keep the loan and how much cash you want to keep in the bank. I like to have this conversation before we write an offer, so we know whether to ask the seller for a credit and how to use it.

Getting the seller to pay

A seller credit of $14,000 toward a buydown can lower your payment far more than a $14,000 price cut. On a $600,000 loan, a $14,000 price reduction saves roughly $90 a month. The same money spent on a 2-1 buydown saves $771 a month in year one. Credits are limited by loan type, so confirm how much your loan allows. Conventional loans tie the limit to your down payment, FHA allows up to 6% and VA allows up to 4% in concessions.

Common mistakes

• Qualifying on the teaser payment. With a 2-1 buydown, lenders qualify you at the full note rate. Make sure the year-three payment fits your budget.
• Ignoring the break-even. Points paid on a loan you refinance in two years are mostly lost.
• Comparing lenders on rate alone. One lender’s 6.75% with two points can be worse than another’s 6.875% with none. Compare the Loan Estimates line by line.

Related reading: How to Choose a Mortgage Lender and When to Refinance.

Frequently asked questions

Are points tax deductible?

Points paid to buy your main home are often deductible in the year you buy. Ask your CPA.

Can builders offer buydowns?

Yes. Builders often offer them as incentives, sometimes tied to their preferred lender. Compare the total cost with an outside lender.

Is a 3-2-1 buydown different?

It works the same way over three years, starting 3 points lower. It costs more upfront.