Every week I talk to buyers who've heard the word "buydown" thrown around by a realtor, a builder, or a Facebook ad — and almost none of them have had it actually explained. So let's fix that.
There are two completely different tools hiding under the same word: a permanent buydown and a temporary buydown. They cost money in totally different ways, they behave completely differently if you refinance early, and picking the wrong one — or structuring it wrong in your contract — can cost you thousands of dollars you'll never see again.
Before we get into the weeds: a temporary buydown mainly improves your cash flow for the first one to three years. A permanent buydown can produce more savings over the long run — but only if you keep the mortgage long enough to clear its breakeven point. Which one actually makes sense for you depends on who's funding it, how long you plan to keep the loan, and what else that money could be doing for you.
Now let's walk through example numbers on a $400,000 Texas purchase so you can see exactly how the math works. All figures below are approximate and rounded for illustration.
At an approximate 6.50%, principal & interest on this loan is roughly $2,275/month.
A permanent buydown means you pay money upfront — "points" — to permanently lower your interest rate for the entire life of the loan. One discount point equals 1% of your loan amount — but one point does not automatically buy you a 0.25% rate reduction. The actual rate reduction you get per point varies based on market pricing, loan program, occupancy, credit profile, loan-to-value ratio, and other factors, and it changes daily.
In our hypothetical example (for illustration only — not a real rate quote): Paying 1 point (≈$3,600) drops the rate from 6.50% to approximately 6.25%.
| Rate | Approx. Monthly P&I | Approx. Monthly Savings | |
|---|---|---|---|
| No buydown | 6.50% | $2,275 | — |
| 1 point paid | 6.25% | $2,216 | $59/month |
You paid roughly $3,600 to save about $59 a month.
Just over 5 years before that point pays for itself. Many borrowers sell or refinance before reaching that point. Discount points are generally paid at closing and are not refunded if you sell or refinance early. If you pay off the loan before reaching breakeven, you likely won't recover the full upfront cost through the monthly savings you actually received — regardless of whether you paid the points yourself or your seller covered them with a credit.
A temporary buydown works completely differently. Instead of permanently changing your rate, a lump sum is deposited into a temporary buydown account (sometimes called a subsidy account — the exact term varies by lender and servicer) at closing, funded by the seller, the lender, or in some cases the borrower, depending on what your specific loan program allows. That account is used to subsidize your payment for a set period — usually 1 to 3 years — after which your rate reverts to the original note rate for the rest of the loan.
One thing that trips people up: you generally still have to qualify for the loan using the full payment at the note rate — not the lower, subsidized payment you'll actually pay in year one. A temporary buydown improves your early cash flow; it is not a way to qualify for a home you otherwise couldn't afford at the real payment.
The most common structures:
| Structure | Year 1 Rate | Year 2 Rate | Year 3 Rate | Year 4+ |
|---|---|---|---|---|
| 1-0 | Note rate − 1% | Note rate | — | Note rate |
| 1-1 | Note rate − 1% | Note rate − 1% | — | Note rate |
| 2-1 | Note rate − 2% | Note rate − 1% | — | Note rate |
| 3-2-1 | Note rate − 3% | Note rate − 2% | Note rate − 1% | Note rate |
| Structure | Year 1 Payment | Year 2 Payment | Year 3 Payment | Approx. Total Cost to Fund |
|---|---|---|---|---|
| 1-0 | $2,044 (5.50%) | $2,275 (6.50%) | — | ≈ $2,775 |
| 1-1 | $2,044 (5.50%) | $2,044 (5.50%) | — | ≈ $5,550 |
| 2-1 | $1,824 (4.50%) | $2,044 (5.50%) | — | ≈ $8,192 |
| 3-2-1 | $1,617 (3.50%) | $1,824 (4.50%) | $2,044 (5.50%) | ≈ $16,098 |
Notice something important: your note rate never changes with a temp buydown. In every one of these scenarios, once the subsidy period ends, you're paying approximately the same $2,275/month you would have paid with no buydown at all. The buydown just softens the first year or two — which is often exactly when a new homeowner's budget is tightest (moving costs, new furniture, etc.).
This is the single most misunderstood part of buydowns, and getting it wrong can cost you thousands.
In a purchase contract, you can negotiate a seller credit that gets applied to fund a temporary buydown account. It's worth being clear-eyed about this: a seller credit isn't free money handed to you — it's typically credit that could otherwise go toward other allowable closing costs or prepaid items, subject to your loan program's limits. Directing it toward a buydown is one use among several, so compare the whole transaction rather than just the buydown cost in isolation: purchase price, note rate and APR, points and lender fees, available seller concessions, cash required at closing, your monthly payment, how long you expect to keep the loan, and the written treatment of any unused buydown funds.
Let's say you negotiate an approximate $10,000 seller credit on our $400,000 house.
Not every loan program permits a borrower-funded temporary buydown the same way it permits a seller or lender contribution — confirm with your loan officer exactly which funding sources are allowed for your specific program before you count on this option.
If the loan is paid off before the temporary buydown funds are fully used, the remaining balance is handled according to the buydown agreement and applicable loan-program and servicing rules. Depending on the arrangement, it may be credited toward the payoff balance, returned to the funding party, or handled another permitted way. Confirm the treatment in writing before closing — don't assume.
Some lenders will offer to fund a temporary buydown themselves, usually by pricing your loan slightly higher in exchange for covering the buydown cost. This can look appealing because it doesn't cost you or the seller anything upfront.
As with seller-funded buydowns, what happens to any unused subsidy under a lender-funded arrangement depends on the specific written agreement and the lender's own terms. Ask directly whether any unused amount is credited to you, retained by the lender, or handled some other way — and get the answer in writing before you commit.
Let's say you close with a 2-1 buydown and end up refinancing 8 months later for any reason.
| Buydown Type | Approx. Unused Amount at Month 8 | What Happens to It |
|---|---|---|
| Permanent buydown (1 point, ≈$3,600) | Not applicable — there's no subsidy account; the point was paid at closing | Generally non-refundable. The cost isn't returned on early sale or refinance, regardless of timing. |
| Seller-funded 2-1 temp buydown (≈$8,192 total) | ≈ $4,500–$4,600 estimated unused | Depends on your specific buydown agreement and loan program — may be applied to your payoff, returned to the seller, or handled another permitted way |
| Lender-funded 2-1 temp buydown | ≈ $4,500–$4,600 estimated unused | Depends on the lender's specific written agreement — confirm in writing before closing |
Whether a seller-funded or lender-funded structure works out better for you depends on the whole picture — the note rate, total loan cost, available seller concessions, and what the written agreement actually says happens to unused funds. Get that comparison from your loan officer before deciding.
None of this works the way you want if it isn't documented correctly. A few things I tell every one of my Texas clients before they sign a contract:
I've seen deals where a buyer and seller had a verbal understanding about a buydown, it never made it into the contract in writing, and the buyer lost the ability to use those funds the way they intended. Don't let that be you.
And sometimes neither is the right move — if that money is better used for reserves, other closing costs, paying down debt, or another permitted use, that may beat either buydown option.
Not sure which buydown option fits your situation? We'll run the numbers and help you choose the best way to save.