Mortgage interest rates influence monthly payments, total borrowing costs, and long-term affordability. In certain market conditions, borrowers may explore interest rate buydowns to adjust how interest is applied to their loan.

Interest rate buydowns can be structured as either permanent or temporary reductions. Each option carries different cost structures, payment impacts, and financial considerations.

This article explains how mortgage rate buydowns work, common types, and factors borrowers may evaluate before choosing this strategy.

What Is an Interest Rate Buydown?

An interest rate buydown is a financing structure that reduces the interest rate on a mortgage either for the full loan term or for a limited period.

The reduction is funded upfront through a lump sum payment. This payment may be made by:

• The borrower
• A home seller (subject to program limits)
• A builder (in new construction transactions)

Buydowns do not eliminate interest. Instead, they change how interest is applied over time.

Permanent Rate Buydowns (Discount Points)

A permanent buydown lowers the interest rate for the entire life of the loan. This is typically accomplished through the purchase of discount points at closing.

How Discount Points Work

• One discount point generally equals 1 percent of the loan amount
• Points are paid at closing
• The lender reduces the interest rate in exchange

Example:
Loan amount: $400,000
One discount point: $4,000

The specific rate reduction per point varies based on market conditions and lender pricing