Overview
When you refinance, an interest rate buydown lets you pay money up front to reduce the loan’s interest rate. That payment—often expressed in “points”—is converted into interest-rate reduction either for the first few years (temporary buydown) or for the life of the loan (permanent buydown).
How buydowns are funded
- Borrower-paid: You pay points at closing to lower the rate.
- Lender-paid: The lender reduces the rate in exchange for higher fees or a slightly higher baseline yield.
- Third-party-paid: A builder, employer, or investor can pay one-time funds to buy down the rate (more common in purchase transactions, but possible at refinance).
Types of buydowns
- Temporary (e.g., 2-1 buydown): Lowers the rate by a fixed amount for year 1 (often 2% lower) and a smaller amount year 2 (often 1% lower), then returns to the note rate. Useful for short-term cash flow relief.
- Permanent (also called “buying the rate down”): You pay points so the reduced rate lasts the life of the mortgage.
Simple example
You refinance $300,000 at a 5.00% note rate. Your lender offers a permanent buydown that reduces the rate to 4.50 for one point (1% of loan = $3,000). Compare monthly principal & interest:
- At 5.00%: P&I ≈ $1,610
- At 4.50%: P&I ≈ $1,520
Monthly savings ≈ $90. Breakeven months = points cost / monthly savings = $3,000 / $90 ≈ 33 months (about 2 years, 9 months). If you plan to stay in the home longer than that, the buydown may pay off.
Calculating breakeven and lifetime impact
- Calculate upfront cost (points × loan amount).
- Compute monthly payment difference between note rate and buydown rate.
- Breakeven = upfront cost ÷ monthly savings.
- For permanent buydowns, also compare total interest paid over the loan term.
In my experience, many homeowners (especially those who expect to keep a mortgage 3–7+ years) find permanent buydowns worthwhile only after running the breakeven and total-interest math.
Temporary buydown example (2-1)
- Note rate: 6.00%
- Year 1 rate: 4.00% (2% reduction)
- Year 2 rate: 5.00% (1% reduction)
- Year 3+: 6.00%
A 2-1 buydown lowers payments most in the first year to ease initial cash flow. It’s commonly financed by setting aside a buydown reserve at closing that the lender uses to subsidize payments.
Who benefits and when it makes sense
- Homeowners needing short-term cash flow relief after a refinance (temporary buydown).
- Borrowers who expect to keep the loan past the breakeven point (permanent buydown).
- Large-balance refinance borrowers, where each basis point saves more dollars monthly.
When a buydown is less attractive
- If you plan to sell or refinance again before the breakeven point.
- If closing costs are already high and paying points reduces needed liquidity.
- When the market offers low no-points rates that yield a similar effective cost.
Tax and accounting notes
- Points paid to obtain a mortgage on a refinance are generally not fully deductible in the year paid; they typically must be amortized and deducted over the life of the loan. There are exceptions when funds are used to improve the home—see IRS guidance (IRS Publication 936 or the current “Home Mortgage Interest” guidance) for details.
- Always check the latest IRS guidance or consult a tax advisor for how points apply to your situation (irs.gov). The Consumer Financial Protection Bureau also explains how points affect closing costs and monthly payments (consumerfinance.gov).
Common mistakes and pitfalls
- Not computing breakeven: Borrowers sometimes pay points without checking how long it takes to recover the cost.
- Confusing lender credits and buydowns: Lender credits reduce closing costs by raising the note rate; they are not the same as paying points to permanently lower the rate.
- Overlooking escrow/insurance changes: Lower P&I can change how much you escrow for taxes and insurance—double-check total monthly cash flow.
How to compare offers
- Ask lenders to quote both the note rate and APR with and without points.
- Request a netsheet showing the buydown cost, lender credits, and how the subsidy is applied over time.
- Calculate breakeven and total interest for the projected holding period.
Practical negotiation tips
- Negotiate both rate and fees—sometimes a lender will accept a slight rate concession rather than points.
- Use comparison worksheets to show the breakeven and lifetime savings to the loan officer.
- Consider splitting costs between a small buydown and a cash reserve to keep liquidity.
Related FinHelp resources
- See our guide on how closing costs change when you refinance a mortgage for help estimating total upfront cash required: How Closing Costs Change When You Refinance a Mortgage.
- If you’re timing a refinance, our analysis of market spreads and refinance timing can help you decide whether a buydown or waiting for better rates makes sense: Refinance Timing: When Market Spreads Make Refinancing Worthwhile.
- For comparisons between rate-and-term and cash-in refinances that affect your ability to pay points, see: Rate-and-Term Refinance vs Cash-In Refinance: Which Fits You?.
Authority and sources
- Consumer Financial Protection Bureau: information on mortgage points and closing costs (consumerfinance.gov).
- IRS: guidance on deducting points and mortgage interest (see IRS publications on home mortgage interest deductions at irs.gov).
Disclaimer
This article is educational and does not replace personalized tax or mortgage advice. In my practice as a mortgage advisor, I recommend running a breakeven analysis and consulting a tax professional before paying points for a buydown.
