Mortgage Rate Buydowns, Explained

Rate buydowns became a central negotiating tool the moment rates stopped being cheap, and they are now one of the most common concessions in new construction. They are also widely misunderstood — including by buyers who accept one without knowing what they gave up to get it.

Here is the plain-English version.

What a buydown actually is

Money is paid up front to lower the interest rate on your mortgage. That is the whole concept. The variables are who pays, how much, and for how long.

The money typically comes from the seller or the builder as a negotiated concession, sometimes from the lender in exchange for other terms, and occasionally from the buyer directly as discount points. The effect is the same: a lower rate, and therefore a lower monthly payment, purchased with cash at closing.

Temporary versus permanent

Temporary buydown

Lowers your rate for a defined early period, then steps up to the actual note rate. The common structures are described by how many points come off in each year — a 2-1 buydown reduces the rate by two percentage points in year one and one in year two, then settles at the note rate from year three on.

Best for: buyers who expect income to rise, who are absorbing other moving costs early, or who genuinely expect to refinance. The risk: if you were counting on refinancing and rates do not cooperate, you must be able to afford the full payment when the step-up arrives. Underwriters generally qualify you at the note rate for exactly this reason — but make sure you have run that number, not just the lender.

Permanent buydown

Discount points paid at closing lower the rate for the entire life of the loan. No step-up, no surprises.

Best for: buyers who intend to hold the loan a long time. The longer you keep it, the more a permanent buydown outperforms almost anything else the same dollars could have bought. The consideration: it takes time to recover the up-front cost, so if you sell or refinance early you may not reach the break-even point.

The comparison that actually matters: buydown or price cut?

This is the decision I get asked about most, and the intuitive answer is frequently wrong.

Suppose a builder offers you a choice between a price reduction and a rate buydown funded with the same dollars. Instinct says take the price cut — a lower price feels more real. But a price cut reduces your loan balance slightly, while a permanent buydown reduces the rate applied to the whole balance for thirty years. Over a long hold, the buydown often produces substantially more total savings.

The variable that flips it is how long you keep the loan. Short hold or likely refinance, the price cut can win. Long hold, the buydown usually wins, sometimes by a wide margin.

I run both against your actual loan amount, your actual quoted rates, and your realistic timeline before you choose. It takes me a few minutes and it is frequently worth thousands.

Why builders offer buydowns instead of discounts

This is the piece of leverage most buyers never learn. A builder's base price sets the comparable sale for every remaining lot in that neighborhood. Cut the price for you and they have just repriced their own inventory.

A concession does not do that. So a builder who will not move a dollar on price will often hand you meaningful concession money for a rate buydown, closing costs, or upgrades. Ask for the buydown, not the discount — you are far more likely to get it, and it is frequently worth more anyway.

See how this plays out in practice on Arlington new construction and Bartlett new construction.

What to watch for

• Compare the lender, not just the incentive. Builder incentives are often tied to using the builder's preferred lender. That can still be a good deal — but get an outside quote and compare total cost, not just the headline rate.
• Get the full cost breakdown in writing. How much is funding the buydown, from whom, and what the rate is in each year.
• Confirm the step-up payment. For a temporary buydown, know the exact payment in every year and satisfy yourself you can carry the highest one.
• Check whether unused funds are refundable if you refinance or sell during the buydown period. Terms vary.
• Do not plan around a refinance. Nobody knows where rates go. Treat a future refinance as upside, never as the plan.

Run your own numbers

Model a real monthly payment with my mortgage calculator, then read the deeper walkthrough on how buydowns work. When you are ready to compare a specific offer, send it to me and I will lay the options side by side.

More on financing: how buyers finance a home here · choosing a Memphis lender

I am a REALTOR®, not a lender, and this page is educational rather than lending advice. Rates, pricing, and program terms change constantly and vary by borrower — get a written quote from a licensed lender for your specific situation.

Questions, answered

What is a buydown in real estate?

A rate buydown is when money is paid up front to lower the interest rate on a mortgage, either for the first few years or for the life of the loan. The funds usually come from a seller or a builder as a concession, sometimes from the lender, and occasionally from the buyer. The practical effect is a lower monthly payment in exchange for cash at closing.

What is the difference between a temporary and a permanent buydown?

A temporary buydown lowers the rate for a set period and then steps up to the note rate — a 2-1 buydown, for example, reduces the rate by two points in year one and one point in year two before settling. A permanent buydown, usually done with discount points, lowers the rate for the entire loan term. Temporary helps with early cash flow; permanent lowers lifetime cost. They suit different situations.

Is a rate buydown better than a price reduction?

Often, and this surprises people. A builder giving you a buydown worth the same dollars as a price cut frequently produces a much larger reduction in total interest paid over a long hold, because it attacks the rate rather than the balance. But it depends on how long you keep the loan — if you sell or refinance in a few years, a price cut may win. The only honest answer comes from running both on your actual numbers, which I will do.

Who pays for a mortgage buydown?

Most commonly the seller or the builder, as a negotiated concession. Builders in particular favor buydowns because they preserve the base price that sets comps for their remaining lots — which is exactly why a buydown is usually easier to negotiate than a discount. Lender-paid buydowns exist too, generally in exchange for a higher rate or other terms. Buyers can pay for one themselves with discount points.

How much does it cost to buy down a mortgage rate?

It varies with the loan amount, the size of the reduction, the loan program, and current market pricing, so any specific figure you read online is likely stale or does not apply to your file. Get an actual quote with a written breakdown from a lender. What I can help with is deciding whether the concession is better spent on the rate or somewhere else.

Should I negotiate a buydown or a lower price from a builder?

With a builder, ask for the buydown. They protect base price because every discount resets the comparable sale for the remaining inventory in that neighborhood, so they will very often give you concession dollars before they give you a price cut. That is leverage worth knowing about before you sit down.