A temporary mortgage rate buydown lowers your monthly principal and interest payment during the first few years of your mortgage. After the buydown period ends, your payment is based on the full interest rate on your loan
How Does a 2-1 Buydown Work?
For example, if your actual interest rate is 6.50%:
- Year 1: Your payment is calculated as if the rate were 4.50%
- Year 2: Your payment is calculated as if the rate were 5.50%
- Year 3 and after: Your payment is based on the full 6.50% rate
A 3-2-1 buydown works similarly, but the reduced payments last for three years.
Who Pays for the Buydown?
Temporary buydowns are typically funded through an upfront contribution, often from a seller or home builder, subject to loan-program requirements.
This is why you may see builders advertising very attractive first-year rates or payments.
The Lower Rate Is Temporary
This is the most important thing to understand.
A temporary buydown does not permanently reduce your mortgage rate. Your loan still has a full interest rate, and your payment will increase as the temporary buydown expires.
When comparing mortgage options, don’t look only at the advertised first-year payment.
Be Especially Careful With New Construction
New construction can have another future expense buyers sometimes overlook: property taxes.
A newly built home may initially have taxes based primarily on the land or an incomplete assessment. Once the completed home is fully assessed, property taxes—and potentially the monthly escrow payment—can increase.
That means a new-construction buyer could eventually see both the temporary buydown payment increase and the property tax payment increase.
Bottom Line
A temporary buydown can be a useful way to reduce your mortgage payment during the first few years of homeownership. But make sure you understand what your full payment will eventually be.
A low introductory payment can look great today. The important question is whether the mortgage still makes sense after the temporary savings are gone.