Guide to mortgage rate buydowns: How they lower your payment

Q: Are mortgage points tax-deductible?

Points paid to lower the rate on a loan to buy your main home are generally deductible as prepaid mortgage interest, sometimes fully in the year paid if IRS conditions are met, otherwise amortized over the loan term. Points on a refinance are typically spread across the life of the loan. IRS Publication 936 sets the rules, and a tax professional should confirm your specific case.

Q: What happens when a temporary buydown ends?

Your payment rises to the full note rate payment, with no further subsidy. On a 2-1 buydown at 7%, that means going from roughly $1,610 to $1,996 a month on a $300,000 loan by year three. Lenders qualify you at the full note rate, not the buydown rate, so you're approved for the higher payment, but budget for it deliberately.

Written by Samantha SheltonNMLS 1647301Updated October 2026

Family moving into a new-construction Michigan home purchased with a builder-funded mortgage rate buydown

A mortgage rate buydown means paying money upfront to lower your interest rate, either temporarily for the first few years or permanently for the life of the loan. The limits are tighter than most explanations admit: Fannie Mae requires a buydown period “not greater than 3 years,” increases of “not more than 1% in the portion of the interest rate paid by the borrower in each 1-year interval,” and a rate reduction that “does not exceed 3%” (Selling Guide B2-1.4-04, dated 08/07/2024, issued with SEL-2024-05).

A permanent buydown works differently. It uses discount points, and one point costs 1% of the loan amount. The widely repeated “one point buys 0.25%” is a rule of thumb, not a rule: the Consumer Financial Protection Bureau says the reduction “depends on the specific lender, the kind of loan, and the overall mortgage market.”

Learn how mortgage rate buydowns work, how a temporary 2-1 buydown differs from permanent discount points, who may fund each, and how to run the break-even math. If you’re mapping out your wider approach first, start with our guide to mortgage rates and the market.

Key takeaways:

Permanent buydowns are priced in points: One point costs 1% of the loan amount, or $3,000 on a $300,000 loan, and in the illustration below it moved the rate from 7% to 6.75%, cut the payment about $50 a month, and took roughly 60 months to pay for itself.
Temporary buydowns never touch the note rate: They subsidize the payment for up to 3 years, stepping up no more than 1 percentage point a year, and Fannie Mae allows them on principal residences and second homes but not on investor properties or cash-out refinances.
Who funds it decides whether it fits: A seller-, builder-, or agent-funded buydown counts against the conventional contribution cap of 3%, 6%, or 9% by loan-to-value and against FHA’s 6% limit, and lenders qualify you at the full note rate either way.

What is a mortgage rate buydown?

A mortgage rate buydown is an upfront payment that reduces your rate or your payment, in two structurally different forms that get confused constantly.

Permanent buydown: You pay discount points at closing and the note rate itself is lower for the entire term. The reduced rate is written into your note, so nothing changes later.
Temporary buydown: The note rate stays where it was. Money deposited at closing is released monthly to cover part of your payment for one to three years, after which the subsidy runs out and you pay the full note payment.

A permanent buydown changes your loan; a temporary buydown changes your first few payments and leaves the loan alone.

A buydown is also not a rate lock. A lock protects a quoted rate while your file is in process; a buydown changes the rate or payment you actually receive. Lock periods, extension fees, and float-down options are terms individual lenders set, not agency rules, which is why they vary between shops. See what a mortgage rate lock is and our overview of rate strategy.

Temporary vs. permanent buydown: What’s the difference?

The cleanest split is who pays and how long it lasts. A permanent buydown is usually borrower-funded and lasts 30 years; a temporary buydown is usually seller- or builder-funded and lasts one to three.

Feature	Temporary buydown	Permanent buydown
Effect on the note rate	None	The note rate is reduced
How long it lasts	1 to 3 years	The full loan term
Who usually funds it	Seller, builder, or lender	The borrower, at closing
Typical cost	About $6,989 for a 2-1 on the example below	1% of the loan amount per point
Qualifying rate	The full note rate	The reduced note rate
Best fit	Buyers expecting income growth or a near-term refinance	Buyers confident they’ll hold past break-even

How does a 2-1 buydown work?

A 2-1 buydown drops your effective rate 2 percentage points in year one and 1 point in year two, then steps up to the note rate in year three and stays there. On a $300,000 loan at a 7% note rate, the schedule looks like this.¹

Period	Rate you pay	Principal and interest	Monthly subsidy
Year 1	5%	$1,611	$385
Year 2	6%	$1,799	$197
Year 3 and after	7%	$1,996	$0

Add the two years together and the buydown costs about $6,989, funded in a lump sum at closing. A 3-2-1 on the same loan starts at 4% with a $1,432 payment and costs about $13,753. That cost, not the payment, is what has to fit inside the contribution limits below.

Underwriting note: lenders qualify you at the full note rate, not the buydown rate. Fannie Mae’s Selling Guide is explicit that “loans subject to temporary interest rate buydowns must be qualified without consideration of the bought-down rate,” using the note rate on a fixed-rate mortgage (B3-6-04, dated 02/07/2024). FHA says the same in different words: “the Mortgagee must use the Note rate when calculating principal and interest for Mortgages that involve a temporary interest rate buydown” (HUD Handbook 4000.1, II.A.5). A 2-1 buydown does not stretch your approval: the lender qualifies you at the full $1,996 payment either way.

The money sits in a dedicated account. Fannie Mae requires buydown funds to be “deposited into custodial bank accounts,” fully funded by delivery, and the FHA buydown escrow agreement must not “permit reversion of undistributed escrow funds to the provider if the Property is sold or the Mortgage is prepaid in full.” Sell or refinance in month 14 and the unused subsidy does not revert to the seller, nor come to you in cash unless you funded it.

How do discount points work on a permanent buydown?

One discount point costs 1% of the loan amount, or $3,000 on a $300,000 loan, and lowers the note rate for the life of the loan. What it does not do is buy a fixed amount of rate.

The CFPB is direct about this: “Sometimes you receive a relatively large reduction in your interest rate for each point paid. Other times, the reduction in interest rate for each point paid could be smaller.” The 0.25% figure repeated everywhere is a market convention that moves with pricing, not a published ratio. Two lenders quoting the same borrower on the same day routinely sell rate at different prices, which is the argument for comparing quotes.

Run the illustration. Say that $3,000 point moves the loan from 7% to 6.75%. The payment falls from $1,996 to $1,946, a saving of about $50 a month. Held the full 30 years, that is roughly $18,050 less interest, or about $15,050 net of the $3,000 you paid.

Points also change how loans compare on paper. As a prepaid finance charge, they push the annual percentage rate above the note rate, which is why APR exists as a comparison tool. Read how the annual percentage rate works before leaning on it, though: APR assumes you keep the loan the full term, so it flatters points for anyone who won’t. The CFPB shows where points and credits appear on your Loan Estimate.

Points on your main home may also be deductible as prepaid interest, but only if a specific set of tests is met, and the treatment differs on a refinance.² That is a conversation for a tax professional.

How do you calculate the break-even point on a buydown?

Divide the upfront cost by the monthly savings. The answer is the number of months you must keep the loan before the buydown pays for itself.

Using the numbers above, $3,000 divided by roughly $50 a month equals about 60 months. Keep the loan longer and the point was worth buying. Sell or refinance in year three and you spent $3,000 to save about $1,800.

Compare the same loan twice: The math only holds if the quotes are identical except for points, so ask each lender to price your file at zero points and at one point.
Count the odds you’ll refinance: A permanent buydown is a bet that you won’t. Check where averages have run at the Freddie Mac survey of current average mortgage rates and decide on your own timeline.

The test inverts for temporary buydowns. Because someone else usually funds them, your break-even is zero months, and the real question is whether you can afford the payment once the subsidy stops. Locking matters here too, since a buydown is negotiated against a specific quoted rate; the benefits of a mortgage rate lock explain why that quote needs protecting.

Two sanity checks either way. Ask what the same seller dollars would do as a price cut: $6,989 off a $315,800 price is roughly 2.2%, which lowers your payment permanently but by far less each month than a 2-1 does in year one. And if the year-three payment is the one you can’t afford, a buydown postpones the problem rather than solving it, which makes improving your debt-to-income ratio the better move.

Who pays for a mortgage rate buydown?

Three parties can fund a buydown, and the source determines whether the structure is permitted at all.

You, the borrower: Standard for permanent buydowns. Points appear as an origination charge on your Loan Estimate and Closing Disclosure.
An interested party: The seller, builder, or agent. This is how most temporary buydowns get funded, and it is capped.
The lender: Fannie Mae permits lender-funded buydowns. FHA excludes premium pricing credits from its 6% limit provided the lender is not also the seller, agent, builder, or developer.

The caps are where deals fall apart. Fannie Mae’s guide is explicit that “if a temporary or permanent interest rate buydown is being offered to the borrower, and the subsidy is funded by an interested party or a lender affiliated with one, the cost of that subsidy must be included in the IPC calculation” (Selling Guide B3-4.1-02, dated 05/07/2025).

Occupancy	LTV/CLTV	Maximum financing concessions
Principal residence or second home	Greater than 90%	3%
Principal residence or second home	75.01% to 90%	6%
Principal residence or second home	75% or less	9%
Investment property	All CLTV ratios	2%

Put the earlier numbers through that table and the constraint is obvious. A $300,000 loan with 5% down implies a price near $315,800 and a 95% LTV, so the cap is 3%, or about $9,474. The $6,989 cost of a 2-1 fits, leaving roughly $2,485 for other seller-paid items. The $13,753 cost of a 3-2-1 does not; it is about 4.36% of the price. At 20% down the cap becomes $22,500 and both clear easily, which is why 3-2-1 buydowns turn up far more often on low-LTV and new-construction files.

FHA sets one number instead of a sliding scale. Interested parties “may contribute up to 6 percent of the sales price,” and that limit “also includes: Interested Party payment for permanent and temporary interest rate buydowns.”³ FHA also bars those contributions from covering your minimum required investment, so a seller cannot fund your down payment through a buydown.

A buydown competes for the same seller dollars as everything else on the settlement statement. Our breakdowns of mortgage closing costs and seller-paid closing costs show what else is in that budget.

Which loans allow a buydown, and which don’t?

Eligibility is narrower than the marketing suggests, and two exclusions catch people by surprise.

Conventional, principal residence or second home: Eligible for temporary buydowns under Fannie Mae Selling Guide B2-1.4-04.
Conventional, investment property: Ineligible. The same section lists investor properties as not permitted.
Conventional cash-out refinances: Ineligible. B2-1.4-04 also lists cash-out refinance transactions as not permitted, so a temporary buydown cannot be attached to one no matter who funds it.
FHA refinances: Not allowed. HUD Handbook 4000.1 states flatly that “temporary interest rate buydowns are not permitted with refinance transactions” (II.A.8, Refinances).
FHA adjustable-rate mortgages: Also barred: “temporary interest rate buydowns are not permitted with ARM transactions” (II.A.8, Section 251 Adjustable Rate Mortgages). If you’re weighing an ARM against a temporary buydown as two routes to a lower early payment, read how fixed and adjustable-rate mortgages differ first.

VA and USDA set their own concession limits and buydown terms, which change independently of the rules above. Rather than repeat a number we can’t tie to a current published instrument, have your loan officer confirm it against the agency’s handbook before you write a buydown into an offer. Permanent buydowns, by contrast, are not restricted by occupancy: points are a price, and price is negotiable everywhere.

How Align times your lock

Locking is a timing decision. Samantha's loans averaged under 14 days from application to clear to close over the last 12 months, across more than 100 loans, so your lock can match the time you actually need.

In late 2022, Freddie Mac found borrowers who got two quotes could have saved as much as $600 a year, and four or more quotes more than $1,200 a year.

Already have an offer from one of the big national lenders you see advertised? Bring us the Loan Estimate. We will compare it line by line and show you where we can do better.

Rate buydowns

Sources: Align Lending loan records, 12 months to October 2026; Freddie Mac, When rates are higher, borrowers who shop around save (February 2023).

FAQ: Mortgage rate buydowns

Here are answers to common questions about mortgage rate buydowns.

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

A permanent buydown uses discount points paid at closing to lower the note rate for the entire loan term. A temporary buydown leaves the note rate alone and funds a subsidy account that covers part of your payment for the first one to three years. Permanent buydowns favor long-term owners; temporary buydowns favor buyers expecting income growth or a near-term refinance. If lower early payments are the goal, weigh both against a fixed versus adjustable-rate mortgage.

Who pays for a temporary buydown?

Most often the seller or the builder, as a purchase incentive negotiated into the contract, and sometimes the lender. The funds are deposited into a subsidy account at closing and released monthly. Because they come out of the seller’s proceeds rather than your pocket, they compete with other concessions for the same limited room, so see the full picture of seller-paid closing costs before deciding how to spend it.

Are mortgage points tax-deductible?

Sometimes, and the conditions are specific. IRS Publication 936 on deducting points lists nine tests that must all be met to deduct points in full in the year paid, including that the loan is secured by your main home and used to buy or build it, and that the points were figured as a percentage of the principal amount. Otherwise you “generally deduct them ratably over the life (term) of the mortgage,” and points paid to refinance generally are not deductible in full in the year paid. Confirm your case with a tax professional, and see how points sit alongside your other mortgage closing costs.

What happens when a temporary buydown ends?

Your payment rises to the full note-rate payment with no further subsidy. On the 2-1 example above, that means moving from about $1,611 to $1,996 a month on a $300,000 loan by year three. You were approved at the $1,996 payment from the start, since lenders qualify at the note rate, so the step-up is a budgeting question rather than an approval one. Building room for it works like improving your debt-to-income ratio: reduce fixed obligations before the increase, not after.

The bottom line on mortgage rate buydowns

A mortgage rate buydown is two products wearing one name. A permanent buydown costs 1% of the loan amount per point and lowers the note rate for the full term; in our $300,000 illustration a $3,000 point saved about $50 a month, a break-even near 60 months. A temporary buydown leaves the note rate untouched, is capped at three years with 1-point annual step-ups under Fannie Mae Selling Guide B2-1.4-04, costs about $6,989 for a 2-1 on that same loan, and is usually seller- or builder-funded inside contribution limits of 3% to 9% on conventional loans and 6% on FHA. Either way you are qualified at the full note rate, so a buydown buys comfort, not approval.

If you’re ready to see whether a buydown beats simply taking the lower-fee loan, talk to Align Lending, we’ll shop your scenario across our lender network and show you both sets of numbers side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. The 7% note rate is an illustration chosen for round math, not a quoted or current rate. Payments shown are principal and interest only on a $300,000 30-year fixed loan and exclude taxes, insurance, mortgage insurance, and any lender overlay. Your rate and terms will depend on your application, your property, and market conditions. Return to text.

2. This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Deductibility of points depends on facts specific to your loan and your return, and the tests in IRS Publication 936 must all be met for a full deduction in the year paid. Consult a qualified tax professional about your situation. Return to text.

3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. References to FHA program requirements are drawn from HUD Handbook 4000.1 and are administered by HUD, which sets and changes them independently of conventional loan guidelines. Return to text.

Sources: Temporary buydown period not greater than 3 years, increases of not more than 1% in the portion of the interest rate paid by the borrower in each 1-year interval, rate reduction not exceeding 3%, eligibility for principal residences and second homes with investor properties and cash-out refinance transactions ineligible, permissibility of lender-funded buydowns with transfer of buydown account funds on a servicing transfer, custodial account and full-funding-at-delivery requirements, and applicability of interested-party contribution limits when an interested party funds the buydown, Fannie Mae Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns, dated 08/07/2024, issued with Announcement SEL-2024-05. Requirement that loans subject to temporary interest rate buydowns be qualified without consideration of the bought-down rate, using the note rate for fixed-rate mortgages, Fannie Mae Selling Guide B3-6-04, Qualifying Payment Requirements, dated 02/07/2024. Maximum financing concession percentages of 3%, 6%, and 9% by loan-to-value ratio for principal residences and second homes and 2% for investment properties, and inclusion of temporary and permanent buydown subsidies funded by an interested party in the IPC calculation, Fannie Mae Selling Guide B3-4.1-02, Interested Party Contributions (IPCs), dated 05/07/2025. Requirement that the Mortgagee use the note rate when calculating principal and interest on mortgages involving a temporary interest rate buydown, HUD Handbook 4000.1, II.A.5, Manual Underwriting of the Borrower. Interested party contribution limit of 6 percent of the sales price, express inclusion of permanent and temporary interest rate buydowns within that limit, exclusion of premium pricing credits from the mortgagee or TPO where that party is not the seller, real estate agent, builder, or developer, and prohibition on using interested party contributions for the borrower’s minimum required investment, HUD Handbook 4000.1, II.A.4, Underwriting the Borrower Using the TOTAL Mortgage Scorecard, and II.A.5, Manual Underwriting of the Borrower. Temporary interest rate buydown escrow requirements, including the prohibition on reversion of undistributed escrow funds to the provider on sale or prepayment in full, HUD Handbook 4000.1, II.A.6, Closing. Prohibition on temporary interest rate buydowns with refinance transactions, HUD Handbook 4000.1, II.A.8, Programs and Products, Refinances. Prohibition on temporary interest rate buydowns with ARM transactions, HUD Handbook 4000.1, II.A.8, Programs and Products, Section 251 Adjustable Rate Mortgages. One point equaling one percent of the loan amount, variability of the rate reduction per point by lender, loan type, and mortgage market, and the operation of lender credits, Consumer Financial Protection Bureau, “What are (discount) points and lender credits and how do they work?” Nine tests for deducting points in full in the year paid, the general rule that points are otherwise deducted ratably over the term of the mortgage, and the treatment of points paid to refinance, IRS Publication 936, Home Mortgage Interest Deduction. Weekly average mortgage rate survey, Freddie Mac Primary Mortgage Market Survey.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Agency guidelines, contribution limits, and program eligibility change and vary by lender, property, and program; confirm current requirements with your lender and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.