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Buydown comparison
Two completely different things get called a "buydown" and they behave nothing alike, so this puts the two of them side by side and shows you the breakeven that usually gets left out of the pitch.
The loan
Permanent buydown breaks even in
—
| Option | Payment | Upfront cost |
|---|---|---|
| No buydown Rate as quoted | — | $0 |
| Permanent points Lower rate for the life of the loan | — | — |
| 2-1 temporary Year 1 / Year 2 / Year 3 onward | — — — | — |
- Monthly saved by paying points
- —
- Total paid over your holding period, no buydown
- —
- Total paid with permanent points
- —
- Total paid with a 2-1 buydown (if seller-funded)
- —
These are two different products with one name
A permanent buydown is you paying points at closing to lower the note rate for the life of the loan. The rate written on your note is actually lower, and it never goes back up.
A 2-1 temporary buydown doesn't change your note rate at all. Money gets placed in an escrow account and used to subsidize your payment, so you pay 2% below the note rate in year one, 1% below it in year two, and the full note rate from year three onward. In year three your payment jumps up to what it always was.
Who pays for it is the real question
Temporary buydowns are usually seller-funded or builder-funded, meaning it's a concession negotiated into the deal rather than money out of your own pocket. When that's the case they're close to free money for you, which is why they showed up everywhere the moment the market softened. But if you are the one paying for a temporary buydown, think hard about it, because you're prepaying your own payments and getting no rate reduction at all in exchange.
You have to qualify at the full note rate rather than at the bought-down rate. So a 2-1 buydown does not help you afford a bigger house, it just softens the first two years of the one you bought. If somebody is pitching a buydown to you as a way to stretch your budget, they're describing it wrong.
And if the plan is "I'll just refinance before year three," I'd want that plan built on something sturdier than a rate forecast. Ask me how the last several years of rate forecasts turned out.
How to read the breakeven
Paying points is a bet on time, and the arithmetic is simple enough. Divide the cost by the monthly savings and you get the month you start coming out ahead. If you'll keep the loan well past that month, paying is rational. But if there's a real chance you sell or refinance before it, you're handing money over for nothing, so don't buy the points. The median American mortgage doesn't survive long enough to justify heavy ones, which is exactly why they get oversold.
Common questions
How much does one point buy?
It varies daily and by program, so sometimes one point buys you 0.25% and sometimes it's closer to 0.5%. The calculator lets you set both figures because that ratio is the whole decision, and any lender quoting you points should be telling you exactly what you're getting for them.
Are points tax deductible?
Points paid on a purchase may be deductible in the year you paid them, and on a refinance they're generally amortized over the loan term, but all of that depends entirely on your situation and on whether you itemize. Ask your CPA, not your lender. I'm not qualified to give you tax advice, and neither is anyone else who is selling you a mortgage.
Should I take a 2-1 buydown if the seller offers one?
Compare it against the alternative use of that concession. The same money could instead buy you a permanent rate reduction, or knock down the purchase price, and which one wins depends on how long you'll keep the loan. Run all three and see.
A calculator can't see your file
These use averages and assumptions. Your actual numbers depend on credit, property, occupancy, and which lender's program fits, and that last part is the part I do. Send me the specifics and I'll replace every estimate on this page with a real figure.