One way borrowers can get a lower interest rate is by putting more money down upfront.This strategy, called a mortgage buydown, involves buying mortgage points that lower your rate by a certain percentage for the life of the loan.
In a temporary buydown, the interest rate is lowered the first year of the mortgage, after which the discount decreases until, eventually, you're paying the initial rate again.
Lenders and sellers typically pay for a temporary buydown to entice a buyer, especially in a high-rate environment.
"These kinds of products typically only get utilized when lenders are desperate to create a need for a consumer," says Gordon Miller, president of North Carolina-based Miller Lending Group.
Below, CNBC Select outlines how you can buy down your mortgage rate, the types of buydowns available and what kind of borrower would benefit from a mortgage rate buydown.
Mortgage buydowns
- How do you buy down an interest rate?
- Which lenders offer mortgage buydowns?
- Who is a mortgage buydown good for?
- Mortgage buydown pros and cons
- FAQs
How do you buy down an interest rate?
Buydowns are an option when purchasing or refinancinga primary residence or second home, but not investment properties or cash-out refinances.
There are two main types of buydowns, which differ by who typically pays for them and how long the discounted interest rate stays in effect.
Mortgage points
Mortgage points, also called discount points, lower your interest rate for the life of the mortgage. A lender may allow borrowers to purchase as little as a fraction of a point or up to four points.
One mortgage point typically costs 1% of your loan and permanently lowers your interest rate by about 0.25%. If you took out a $150,000 mortgage, for example, one point would cost $1,500 and get you a 0.25% discount. Two mortgage points would cost $3,000 and lower your interest rate by 0.50%.
While that formula is common, the specific cost and discount can vary.
"What you get with one point from one lender could be worlds different than with another," said Jennifer Beeston, senior vice president at Chicago-based mortgage company Guaranteed Rate.
Temporary buydowns
In a temporary buydown, the interest rate is lowered for a set period and then increases each year until it returns to its original level.It is typically paid for by a lender, seller or homebuilder to incentivize a buyer.
1-0 buydown
In this situation, the interest rate would drop 1% for the first year of the loan, then revert to the original rate in the second year.
2-1 buydown
In a 2-1 buydown, the interest rate is slashed by 2% in the first year, 1% in the second year and then returns to normal in the third.
Here's what a $350,000 loan with 6.25% interest would look like with a 2-1 buydown
Mortgage rate buydown example
| Interest rate | Monthly payment | Monthly savings | Yearly savings | |
|---|---|---|---|---|
| Year 1 | 4.25% | $1,722 | $433 | $5,196 |
| Year 2 | 5.25% | $1,933 | $222 | $2,664 |
| Year 3 | 6.25% | $2,155 | $0 | $0 |
3-2-1 buydown
A 3-2-1 buydown would see your interest drop 3% in the first year, 2% in the second year and 1% in the third year, before returning to the original mortgage rate. This would offer the most significant reduction, so you need to be sure you can afford payments when the buydown period ends.
Which lenders offer mortgage buydowns?
Not all lenders offer mortgage buydowns and terms vary. In addition, you still need to qualify for the home loan based on the full interest rate.
The largest mortgage provider in the U.S., Rocket Mortgage offers 30-year fixed, jumbo, VA and FHA loans with two or more discount points available.
Rocket Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages are available.
Types of loans
Conventional loans, FHA loans, VA loans, Jumbo loans, low-down-payment mortgages
Terms
10-, 15- and 30-year fixed-term conventional loans, 30-year VA and FHA loans, custom mortgages with fixed-rate terms from 8 to 29 years.
Credit needed
620 for conventional loans
Minimum down payment
0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
Already have a mortgage through Rocket Mortgage or looking to start one? Check out the Rocket Visa Signature Card to learn how you can earn rewards.
Read our review of Rocket Mortgage
Bank of America offers points on 15-year, 20-year and 30-year fixed mortgages, as well as ARMs with 5-year, 7-year and 10-year initial terms. Borrowers who meet income requirements can qualify for the America's Home Grant® program, which provides up to $7,500 to permanently buy down your interest rate.
Bank of America Home Mortgage Loans
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, Affordable Loan Solution® mortgage, Doctor loans
Terms
Varies
Credit needed
Conventional loans typically require a 620 credit score
Minimum down payment
3% with Bank of America's Affordable Loan Solution® mortgage loan
Terms apply.
Offers first-time homebuyer assistance?
Yes — click here for details
An online-only lender, SoFi offers fixed-rate conventional loans with 10-year, 15-year, 20-year and 30-year terms and ARMs with 5-year, 7-year and 10-year initial periods. It also issues government-backed FHA and VA loans and jumbo loans up to $3 million.
SoFi
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
VA loan, FHA loan, conventional loan, fixed-rate loan, adjustable-rate loan, jumbo loan, HELOCS & Closed End Second Mortgages
Terms
10 – 30 years
Credit needed
600
Minimum down payment
3%
Terms apply.
Who is a mortgage buydown good for?
A rate buydown may be appealing, but ask yourself these questions:
What kind of mortgage do you have?
Adjustable-rate mortgages are typically only eligible for buydowns if the initial interest rate period is at least three years. There are also restrictions on FHA loans and other government-backed mortgages.
How long will you live in your home?
A buydown could save you a lot in the long term, but it'll take time to make back that initial investment: If you took out a $300,000 mortgage with a 7% interest rate and bought four points, your interest would drop to 6% but it would cost you $12,000.
While you'd save $1,000 a year in interest payments, you would have to stay in your house for more than 12 years to reach your break-even point.
The Mortgage Research Center'sonline calculatorcan show you how many months it will take for the points to pay for themselves, as well as what your monthly mortgage payment will be and the net interest you'll save.
Have you looked at other incentives?
A buydown could come at the expense of other seller concessions, like a discount on the purchase price or getting the seller to pay for closing costs (which can equal more than 5% of your mortgage).
Could you get the same rate by refinancing?
When you can consider refinancing depends on the kind of mortgage you took out and how much home equity you have. For conventional loans, you typically get the best rates if you have 20% equity.
There are refinancing programs with Freddie Mac and Fannie Mae that guarantee an interest rate decrease of at least 0.50%. There are also streamlined refinancing options for both FHA and VA loans.
"The last thing I want is veterans spending a nickel to buy down a rate that they're likely to refinance within the next year because then it's just lighting money on fire," Beeston said.
Did you shop around?
Before you look at any buydowns, make sure the starting rate is a good deal by comparing loan offers from multiple lenders.
"Never get one quote because the industry can operate like a bad flea market," Miller said, adding that buyers should be wary of any lender willing to price match.
Mortgage buydown pros and cons
The benefits and drawbacks of a mortgage buydown
Pros
- Lower monthly mortgage payments
- Borrowers can qualify for a larger loan
- If you itemize your tax return, you may be able to deduct the cost of mortgage points.
Cons
- Increased closing costs
- If you get a temporary buydown, you'll need to be able to afford the increases.
- Not all lenders offer mortgage points.
FAQs
What is a mortgage buydown?
A buydown is a way to temporarily or permanently lower your interest rate with more money upfront. A borrower may purchase points, which lower the interest rate by a certain percentage. In other cases, the lender or seller will pay for a temporary buydown to help close the deal.
How much do mortgage points cost?
Typically, one mortgage point costs 1% of your total home loan, though it can depend on the loan and lender
What is a 2-1 buydown?
This is a temporary buydown in which the interest rate drops by 2% in the first year of the loan, then the discount drops to 1% in the second year. In the third year of the mortgage, the rate returns to normal.
How much can you buy down a mortgage rate?
If you are buying mortgage points, each point typically reduces your mortgage rate by 0.25%. Lenders may allow you to buy as many as four points, which would lower your interest rate by 1%.
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Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewedGordon Miller, president of North Carolina-based Miller Lending Group, and Jennifer Beeston, mortgage educator and senior vice president at Guaranteed Rate.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Everymortgagearticle is based on rigorous reporting by our team of expert writers and editors with extensive knowledge ofmortgageproducts.While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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