There is more than one way to get a lower interest rate. One option that some borrowers use is getting a temporary buydown from the seller or builder. A temporary buydown allows a seller or builder to put funds into an escrow account to reduce the interest rate for one, two, or three years at the start of the mortgage. In turn, this could reduce the borrower’s monthly mortgage payment temporarily. A temporary buydown calculator, like the one below, can help borrowers understand how a buydown might work for their situation.
Wondering what a mortgage looks like broken down into monthly payments? Or how decreasing your down payment will impact what you pay over time? Use our calculators to run the numbers for yourself.
| Year | Rate | Payment | Monthly Savings2 | Annual Savings |
|---|
This is the total estimated cost that can be paid for by the buyer, seller, lender or third party.
Subject to investor guidelines.
These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only. Payments shown are estimates and do not include amounts for taxes and insurance premiums (if applicable). The actual payment obligation will be greater. This does not constitute an offer or approval of credit. Contact a PrimeLending home loan officer for actual estimates.
2Monthly savings based on initial period payments (based on buydown type) compared to payments after rate returns to its regular rate before the buydown.
3A temporary buydown reduces the initial rate by up to 3%. Adjusts 1% each year, returns to original fixed rate after buy down period. For example, a 3-2-1 buydown Conventional 30 year fixed rate loan with a purchase price of $572,000, down payment of 20%, and an annual percentage rate of 7.178% would result in an interest rate of 4.125% (monthly payment of $2,772.20) for the first year, 5.125% (monthly payment of $3,114.47) for the second year, 6.125% (monthly payment of $3,475.53) for the third year, and 7.125% at cost of .051 points ($291.72) paid at closing (monthly payment of $3,853.67) for the fourth year which will continue for the life of the loan thereafter. Rate pulled 12/5/24, rates subject to change. Scenario used a 740+ credit score. Loans are subject to borrower qualifications, including income, property evaluation, and final credit approval. Temporary buydowns must be paid for by seller or builder. Certain loan programs do not allow buydowns, additional restrictions apply. Payment shown is principal and interest and does not include amounts for taxes and insurance premiums (if applicable). The actual payment obligation will be greater. Contact your PrimeLending loan officer for more details.
Types of Temporary Buydowns
The type of temporary buydown you seek will depend on your individual needs. A borrower could reduce their rate for one year or up to three years if they so choose. The rate returns to the original fixed rate after the buydown period.
3-2-1 Temporary Buydowns
A 3-2-1 temporary buydown can reduce a homebuyer’s interest rate for three years and will lower the rate by 3% the first year, 2% the second year and 1% the third year. After the third year, the rate will remain the same for the loan term.
2-1 Temporary Buydowns
The 2-1 temporary buydown reduces the borrower’s interest rate for two years, reducing the rate by 2% the first year and 1% the second year.
1-1 Temporary Buydowns
There is also a 1-1 temporary buydown which will reduce the buyer’s interest rate by 1% for the first two years of their mortgage.
1-0 Temporary Buydowns
Finally, the 1-0 temporary buydown which allows the borrower to reduce their interest rate by 1% for the first year of their loan.
Using the buydown calculator can help you discover what you might be able to save on your own mortgage.
How do you calculate a mortgage buydown?
Trying to do the math yourself to calculate a mortgage buydown can be challenging. Using PrimeLending's free mortgage calculator can make it easy because our calculator will do the math for you. Here’s how to calculate a mortgage buydown using the mortgage buydown calculator:
Select your buydown type from the dropdown menu (3-2-1, 2-1, 1-1, or 1-0)
Enter the number of years of your loan term, the total loan amount, and the interest rate percentage into the remaining calculator fields and click Calculate.
The difference between the payment amount of the original mortgage and the total annual savings of the buydown program selected equals the total cost of the buydown.
How does a buydown work on a mortgage?
A temporary mortgage buydown is a lump sum that will need to be paid for by the builder or seller to temporarily reduce the interest rate of the mortgage for a specified time frame. Since the buydown lowers your interest rate, it will effectively reduce your overall monthly mortgage payment for the first few years of your mortgage.
What is the difference between a buydown and discount points?
A temporary buydown and discount points are both options that can help a borrower secure a lower interest rate. While each option achieves similar results, they are very different approaches to lowering the interest rate on a mortgage.
Discount Points vs. Temporary Buydown
Discount points, also known as mortgage points, are upfront fees a borrower can pay to get a reduced interest rate over the life of their loan. One (1) discount point costs 1% of the loan amount. Each discount point may lower the interest rate as much as 0.25%, depending on product and loan characteristics. Discount points are the most effective when a borrower stays in the home long enough for their saving to breakeven on what the points cost.
To get an idea of how mortgage points may work for you, try our free discount point calculator.
Unlike discount points, a temporary buydown is paid by the seller or builder and reduces the interest rate on a mortgage for the first few years of the mortgage, depending on which buydown the borrower seeks. A temporary buydown can be a great option to help you ease into your mortgage payments or if you plan to move within a few years.
Is a buydown a good idea?
A temporary mortgage buydown can benefit both buyers and sellers. For buyers, an interest rate buydown reduces the interest rate for the first few years of the mortgage which also reduces the monthly payment for the term of the buydown. Sellers like the buydown option because it enables them to offer a tangible financial benefit to the buyer without reducing the asking price of the home. The buydown also makes the home more affordable for the first few years. They key to using a buydown option is making sure the buydown is discussed during the offer and negotiation process of the home purchase, so buyers and sellers are on the same page.
See if a temporary buydown is the right option for you. Connect with us today to learn more.
