FAQ: What is a mortgage rate buydown?

A mortgage rate buydown is a strategy that uses upfront funds to reduce the interest rate on your mortgage. By lowering the rate, a buydown can reduce your monthly mortgage payment. Depending on the type of buydown, the lower rate may apply for a limited period of time or for the life of the loan.

There are two common types of rate buydowns. A temporary buydown lowers the interest rate for an initial period, such as the first one or two years of the mortgage, before the rate returns to the original note rate. A permanent buydown, often accomplished by paying discount points, lowers the interest rate for the entire life of the loan.

The funds used for a buydown can come from different sources. A buyer may choose to pay the cost upfront, or in some transactions, the seller may contribute toward a buydown as part of the purchase agreement. Seller contributions are subject to loan program guidelines and other limits, so they aren’t available in every situation.

Whether a buydown makes sense depends on several factors, including the loan amount, interest rate, upfront cost, and how long you expect to keep the mortgage. A lower monthly payment can provide more room in your budget, but it’s important to compare the upfront cost with the potential savings over time.

A rate buydown can be another tool to consider when evaluating your mortgage options. Rather than simply focusing on the interest rate, look at the complete picture – including your upfront costs, monthly payment, and financial goals. Your loan originator can help you compare different scenarios and determine how a buydown could fit into your overall homebuying strategy.