What's a temporary buydown?

A buydown means someone pays money up front so your rate is lower

That's the whole idea. Cash goes in at closing, and in exchange your interest rate drops. A temporary buydown drops it for the first years only. A permanent one drops it for the life of the loan. The money can come from the seller, a builder, or your SelfCloze rebate.

How a 2-1 works

• Year 1: you pay as if the rate were 5%. That's $4,295 a month, about $1,028 less.
• Year 2: you pay as if the rate were 6%. That's $4,796 a month, about $526 less.
• Years 3–30: you pay the real rate, 7%, at $5,322 a month.
• The money to cover years 1 and 2 sits in an escrow account at closing. Here that's about $18,646.

A 2-1 steps your rate up over three years. Say your loan is $800,000 at 7%, which is a $5,322 payment.

1-0, 2-1 and 3-2-1 compared

• 1-0: 1% lower in year 1 only. Costs about $6,312.
• 2-1: 2% lower in year 1, 1% in year 2. Costs about $18,646. This is the common one.
• 3-1: 3% lower in year 1, 2% in year 2, 1% in year 3. Costs about $36,684. A lender may call this a 3-2-1.
• On a $1M home where the seller offers 3%, your rebate is about $25,000 — enough for the 2-1, not the 3-1.

Same loan, same 7% note rate. Bigger buydowns cost more because they cover more.

Temporary vs. permanent

• Temporary gives you a big saving now that goes away. About $1,028 a month in year one.
• Permanent gives you a smaller saving that never goes away. The same $25,000 buys roughly 3.1 points, taking 7% to about 6.22% and saving around $413 a month.
• Permanent takes about five years of those savings to earn back what you paid. If you'd sell or refinance sooner, temporary usually wins.
• If money is tight in the first year or two and you expect to earn more later, temporary fits better.

Permanent means buying points: you pay about 1% of the loan per point, and each point lowers the rate around 0.25% for as long as you keep the loan.

Who can pay for it

• The seller, as a credit written into the contract.
• A builder, which is common on new construction.
• Your SelfCloze rebate. The seller pays your agent, we keep a flat fee, and the rest can fund the buydown.
• You, out of pocket, though that defeats much of the point.
• Every loan programme caps what the seller side can contribute in total, so check the cap before you plan around it.

Pros and cons

• Pro: a real, large drop in the payment right when moving costs are highest.
• Pro: it costs you nothing if the seller or your rebate funds it.
• Pro: unused money usually goes to your loan balance if you refinance or sell early.
• Con: the payment goes up on schedule whether your income did or not.
• Con: you're usually qualified at the full rate anyway, so it doesn't help you borrow more.
• Con: if you were always going to keep the loan 10+ years, points may be worth more.

Five questions to ask your lender

• Do you offer temporary buydowns, and which structures?
• What exactly will this buydown cost on my loan?
• Will you qualify me at the note rate or the bought-down rate?
• What happens to the unused money if I refinance or sell in year one?
• Is a permanent buydown a better use of the same money for how long I plan to stay?

Short FAQ

• Is my loan balance higher? No. The rate and balance are unchanged; a separate account pays part of the payment.
• Can I get the money as cash instead? Generally no. Lenders limit cash to the buyer, and the rebate usually has to go to closing costs or a buydown.
• What if rates fall? You can refinance, and the unused buydown money is typically applied to your balance.
• Is a 3-1 the same as a 3-2-1? Yes. We call it a 3-1; a lender's rate sheet will usually say 3-2-1. Same product, stepping down over three years.
• Does this work on FHA or VA? Usually yes, with different caps on what the seller side can pay.