What Is a Mortgage Buydown?

Estimated reading time: 5 minutes

As mortgage rates have gone up, so has the popularity of temporary mortgage buydowns. Temporary buydowns allow homebuyers to lower a mortgage rate — often for 1–3 years — in exchange for an upfront cost. In the process, they can save homebuyers thousands of dollars. And as a bonus, buyers usually don’t pay for them.

Many sellers and builders, and some lenders (including Mr. Cooper), have been paying some or all the cost to help homes sell faster while rates are higher. Here are the basics on mortgage buydowns and how they work.

How does a mortgage buydown work?

Temporary mortgage buydowns can be structured in a variety of ways, but they’re usually structured as 1-0, 2-1, or 3-2-1 buydowns. In each case, the first number tells you how many percentage points lower an interest rate will be the first year of a mortgage. The second number tells you how much lower the rate will be the second year, and so on. Putting everything together:

• A 1-0 buydown would drop your rate by 1% the first year of a mortgage, and 0% the second year. (In other words, the rate will be lower for 1 year.) Mr. Cooper’s 1% Mortgage Markdown discounts your monthly payment by reducing your interest rate by a full percentage point for one year.¹ Learn more.
• A 2-1 buydown would drop your rate by 2% the first year of a mortgage, and 1% the second year.
• A 3-2-1 buydown would drop your rate by 3% the first year of a mortgage, 2% the second year, and 1% the third year.

Note: Be careful not to confuse temporary mortgage buydowns with discount points, which lower a mortgage rate permanently (e.g., .25%).

How much can I save with a temporary buydown?

Our mortgage buydown calculator can help you crunch the numbers — once you’re on the page click “Calculate Payment” under “1% Mortgage Markdown.”

Now, let’s look at a quick scenario:

The Garcias are purchasing a $400,000 home, and they qualify for a 30-year fixed rate mortgage with a 6.75% interest rate. They’re also putting 10% down ($40,000). This will make their final loan amount $360,000, and their normal monthly payment* (principal and interest) will be $2,335.

With a 1-0 buydown, they’ll save an estimated $2,809.

1-0 Buydown	Normal Payment	Year 1 Rate
Interest Rate	6.75%	5.75%
Monthly Payment (Principal & Interest)	$2,335	$2,101
Savings/ month	–	$234
Savings/ year	–	$2,809

Following on, with a 2-1 buydown, they’ll save an estimated $8,293.

2-1 Buydown	Normal Payment	Year 1 Rate	Year 2 Rate
Interest Rate	6.75%	4.75%	5.75%
Monthly Payment (Principal & Interest)	$2,335	$1,878	$2,101
Savings/ month	–	$457	$234
Savings/ year	–	$5,484	$2,809

Finally, with a 3-2-1 buydown, they’ll save an estimated $16,306.

3-2-1 Buydown	Normal Payment	Year 1	Year 2	Year 3
Interest Rate	6.75%	3.75%	4.75%	5.75%
Monthly Payment (Principal & Interest)	$2,335	$1,667	$1,878	$2,101
Savings/ month	–	$668	$457	$234
Savings/ year	–	$8,013	$5,484	$2,809

*Monthly payment estimates do not include monthly property taxes, homeowners insurance, or private mortgage insurance (PMI) costs.

How much does it cost to buy down an interest rate?

A temporary buydown’s final cost will depend on how much the buydown will save you. To that end, let’s look at the Garcia’s 1-0 buydown example above that will save them $2,809.

Seller-funded buydown

If their seller (or homebuilder) funds the buydown, $2,809 is how much the Garcia’s mortgage company will need to collect from the seller at closing. Then, the Garcia’s mortgage company will put the funds in an escrow account and apply a portion of the funds to the Garcia’s mortgage payment each month.

That said, some sellers fund a buydown by adding the cost to their home’s sales price. So, if a home is selling for $300,000 and a buydown will cost $5,000, the final sales price would be $305,000. The extra $5,000 would transfer to the lender at closing rather than coming out of the seller’s pocket. Note that the home will also need to appraise for that higher cost.

Lender-funded buydown

If a lender funds the buydown, the lender will provide the $2,809 for the escrow account, and the Garcias will pay any additional fees the loan requires.

Should I buy down my mortgage rate?

Everyone’s situation is different, but buying down your mortgage rate may be a good idea if you worry that interest rates will go down in the future. A seller- or lender-funded buydown can give you a way to buy a house now for less while waiting to see if rates change.

If rates do go down eventually, you can consider refinancing your mortgage to a better rate then. Expert advice varies, but outlets like Investopedia report that refinancing can make financial sense when rates are 1 or 2% lower than your current rate.

Ready to get started on a mortgage buydown? Call our Mortgage Professionals at 833-702-2511 to discuss your options, or get started online.

Disclaimers

1. Mr. Cooper’s Mortgage Markdown is a temporary buydown program that reduces the borrower’s effective interest rate and effective monthly payment for a one year period of time by establishing a custodial escrow account, which will be funded partially by the lender and partially by the borrower (in the case of a VA loan the account will be funded entirely by the lender), and funds will be dispersed from the escrow account to cover the difference in interest during the one year buydown period which subsidizes the monthly payment amount. Mortgage Markdown is available for purchase loans that are locked by 12/31/2024. Mortgage Markdown is only available on purchase loans for primary residences. Not available on jumbo loans, second mortgages, or refinance transactions. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans. This offer is subject to changes or cancellation at any time at the sole discretion of Mr. Cooper. Not available on all purchase transactions. Additional restrictions/conditions may apply. Offer is contingent on qualification per full underwriting guidelines.