Buy Down Your Interest Rate: Everything You Need to Know

When interest rates fluctuate, many homebuyers explore creative ways to lower their monthly mortgage payments—and buying down your interest rate is one of the most effective options. This strategy involves paying upfront to secure a lower interest rate for the short term or even the life of your loan. But how does buying down an interest rate work, and is it right for you? Whether you’re purchasing your first home or considering a new financial strategy, this guide will walk you through everything you need to know about mortgage buy downs—from the different types of buy downs available, to the costs, benefits, and scenarios of where this strategy makes the most sense. 

What is a buy down on a mortgage? 

A mortgage buy down is a financing strategy where borrowers pay an upfront fee to reduce their loan’s interest rate, leading to lower monthly payments. This fee, often referred to as “points,” is typically 1% of the loan amount per point. Each point can lower the interest rate by approximately 0.25%, though this can vary by lender. Buy downs can be temporary, reducing rates for a set period, or permanent, affecting the entire loan term. 

Types Of Interest Rate Buy Downs 

There are several types of interest rate buy downs available, each designed to offer a different level of savings and fit a variety of financial situations. Whether you’re looking for immediate relief on your mortgage payments, or a long-term solution, it’s important to understand the differences between each buy down method. 

1 – 0 Buy Down 

A 1-0 buy down temporarily reduces your interest rate by 1% for the first year of your loan. For example, if your original interest rate is 6%, you’ll pay just 5% during the first year. After that, the rate returns to the full 6% for the remainder of the loan term. This type of buy down is ideal for borrowers who anticipate higher earnings or fewer expenses in the near future and want a little breathing room as they adjust to homeownership. 

2 – 1 Buy Down 

A 2-1 buy down gives you a more gradual increase in payments by lowering the rate by 2% in the first year and 1% in the second year. So, if your original interest rate is 6%, you’ll pay 4% in year one, 5% in year two, and then the full 6% starting in year three. This staged approach is helpful for homebuyers who want a bit more time to grow into their mortgage payment, such as first-time buyers or those transitioning to a new job with higher expected income. 

3 – 2 – 1 Buy Down 

The 3-2-1 buy down offers the most significant temporary reduction in your interest rate. Using a 6% base rate as an example, your first-year rate would be 3%, second year 4%, third year 5%, and then the full 6% starting in year four. This format allows for major initial savings, making it an attractive option for buyers who expect a sharp increase in income over a few years, such as recent graduates or entrepreneurs. 

Permanent Buy Down 

Unlike temporary buy downs, a permanent buy down reduces your interest rate for the life of the loan by paying points upfront. For instance, if you purchase two points on a $300,000 loan (typically costing $6,000), you could lower your rate from 6% to 5.5% permanently. This strategy is especially beneficial for long-term homeowners who plan to stay in the property for many years and want to maximize savings over time. Permanent buy downs provide consistent monthly payment relief with no rate increases later in the loan. 

How does an interest rate buy down work? 

When opting for a buy down, borrowers pay points upfront at closing. Each point, costing 1% of the loan amount, reduces the interest rate by a set percentage. For example, on a $300,000 loan, paying one point ($3,000) might lower the rate from 6.5% to 6.25%. This reduction decreases monthly payments, resulting in long-term savings. 

At Direct Mortgage Loans, your loan officer can walk you through how a buy down works and whether it’s the right move for your financial goals. Working with a knowledgeable lender ensures that your strategy is tailored to your specific needs and budget. 

Examples Of Interest Rate Buy Downs  

Scenario: A borrower takes out a $300,000 30-year fixed-rate mortgage with an interest rate of 6.5%. 

• Without Buy down: The borrower pays the full 6.5% from day one. This results in a monthly principal and interest payment of approximately $1,896. 
• With 1 Point Buy down (6.25% interest rate): By paying one discount point (1% of the loan amount, or $3,000), the borrower secures a reduced interest rate of 6.25%. This lowers the monthly payment to around $1,847. 
• Monthly Savings: The difference in monthly payments is about $49. This might seem small monthly, but it adds up over time. 
• Break-even Point: To determine when the borrower starts to see real savings, divide the upfront cost by the monthly savings. $3,000 ÷ $49 = approximately 61 months, or just over 5 years. 
• Long-Term Impact: If the borrower stays in the home for longer than 5 years, they begin saving more than they initially paid. Over the life of the loan (30 years), the total interest savings would far exceed the upfront cost of the buy down. 

How much does it cost to buy down interest rates? 

The cost of buying down an interest rate varies based on the number of points purchased and the loan amount. Typically, one point costs 1% of the loan amount and reduces the rate by 0.25%. For instance, on a $250,000 loan: 

• 1 Point: $2,500 cost, 0.25% rate reduction. 
• 2 Points: $5,000 cost, 0.5% rate reduction. 

It’s essential to calculate the break-even point to determine if the upfront cost justifies the long-term savings. 

Tip: If covering the cost of a buy down feels out of reach, don’t overlook the possibility of negotiating with the home seller to contribute toward it as part of the deal. Seller-paid buy downs are a common incentive in many markets and can make homeownership more affordable without increasing your upfront financial burden. Learn more about how sellers can assist in the ‘Home Sellers’ section below. 

Interest Rate Buy Down Calculator  

To understand how much you could save with a rate buy down, you can use a simple formula to estimate the benefit. Here’s how a typical calculation works: 

1. Determine the cost of the buy down: This is usually calculated in points, where 1 point equals 1% of your loan amount. For example, on a $300,000 loan, 1 point would cost $3,000. 
2. Estimate the interest rate reduction: Each point typically reduces your interest rate by 0.25%, although this can vary by lender. 
3. Calculate your new monthly payment: Using a mortgage payment formula or a mortgage amortization table, plug in your new lower rate and compare it to your original monthly payment. 
4. Find the monthly savings: Subtract the new monthly payment from your original payment amount to see how much you’re saving each month. 
5. Calculate the break-even point: Divide the total upfront cost of the buy down by your estimated monthly savings. This tells you how many months it will take to recoup the upfront cost. 

Who can buy down a mortgage interest rate? 

Interest rate buy downs aren’t limited to just buyers—several parties involved in the home buying process can contribute to lowering a borrower’s interest rate. Understanding who can assist with a buy down can open doors to more flexible financing options, especially when working with a knowledgeable lender like Direct Mortgage Loans (DML). DML loan officers can help identify if seller or builder-paid buy downs are available and structure your loan to maximize affordability. Here’s how each group may play a role: 

Home Buyers 

Home buyers can voluntarily choose to buy down their interest rate by paying points at closing. This is typically done to reduce monthly mortgage payments and long-term interest costs. Buyers often consider this option if they plan to stay in their home long enough to reach the break-even point and benefit from the upfront investment. 

Home Sellers 

In a competitive real estate market, home sellers may offer a buy down as a concession to attract buyers. By covering the cost of the buy down, the seller helps make the buyer’s mortgage more affordable, which could lead to a faster sale. This is often structured into the purchase agreement as a seller-paid closing cost. 

Home Builders 

Builders frequently use buy downs as promotional incentives to increase sales of newly constructed homes. By offering to temporarily lower the buyer’s interest rate, they can make new homes appear more affordable and appealing, especially when interest rates are high. This tactic is particularly common in new developments and large communities. 

Mortgage Lenders 

Some mortgage lenders provide buy down options as part of their rate offerings, especially during promotions or partnerships with builders and real estate professionals. In some cases, lenders may offer temporary buy downs at reduced costs. Speaking to a loan officer at Direct Mortgage Loans can help you understand how you can take advantage of a rate buy down or if it is the right move for you. 

When To Buy Down Interest Rate 

Timing a buy down correctly can make a big difference in how beneficial it is for your financial situation. The best time to buy down your interest rate often depends on your long-term homeownership plans, available cash at closing, and the current state of mortgage rates. 

You should consider a buy down if: 

• You plan to stay in the home for several years. A buy down usually requires an upfront investment, and it could take several years to break even. If you’re staying in the home long-term, you’ll have more time to benefit from the lower monthly payments and overall interest savings. 
• You have additional funds available at closing. If you have room in your budget beyond your down payment and other closing costs, applying those funds to a buy down could reduce your financial burden over time. 
• When mortgage rates are relatively high. When interest rates are elevated, buying them down could offer significant savings over the life of the loan. It’s a smart way to lock in a more manageable payment. 
• You’re close to qualifying for a home. A buy down could be used to lower your monthly payment just enough to meet a lender’s debt-to-income ratio requirements, which could help your mortgage approval. 

However, you may want to skip a buy down if you’re planning to refinance or move within a few years. In that case, you likely won’t be in the loan long enough to recoup the upfront cost. 

If you’re unsure whether a buy down makes sense for your situation, speaking with a loan expert at Direct Mortgage Loans can help. They’ll evaluate your long-term plans, review your financial picture, and explain the potential return on investment. 

Is it worth it to buy down your interest rate? 

When deciding whether to buy down your interest rate,  weigh the upfront cost against the long-term benefits. For some buyers, the monthly savings and long-term interest reductions make the added cost at closing a worthwhile investment. For others, particularly those planning to move or refinance within a few years, it may not offer a strong return. Let’s break down the potential advantages and disadvantages so you can make an informed choice based on your financial goals and homeownership timeline. 

Pros of Buying Down Interest Rate 

• Lower Monthly Payments: By reducing your interest rate, your monthly mortgage payments become more affordable. This could help you better manage your budget by freeing up funds that could be used for savings, home upgrades, or paying off other debts. With a lower monthly obligation, you may also gain more financial flexibility and peace of mind, especially in the early years of homeownership. 
• Long-Term Savings: Although there is an upfront cost involved, the interest savings over the life of the loan can be substantial. For homeowners planning to stay in their property long-term, this could mean tens of thousands of dollars saved on interest alone. This cumulative benefit can significantly impact your financial stability over the years. 
• Potential Tax Benefits: In many cases, the points paid to reduce your interest rate may be tax-deductible, particularly if the buy down is used on a primary residence. This means you could recover a portion of the upfront cost through your annual tax return. Always consult with a qualified tax advisor to confirm eligibility based on your individual situation. 
• Increased Home Affordability: In some cases, lowering your monthly payment through a buy down might help you qualify for a larger loan amount. This could allow you to afford a home with features or in a neighborhood that may have otherwise been slightly out of reach. 
• Custom Financing Options with Direct Mortgage Loans: When you work with Direct Mortgage Loans, their experienced team can customize a buy down strategy that aligns with your goals. Whether it’s coordinating with sellers for concessions or helping you compare short-term and long-term savings, DML provides tailored guidance to make your investment work smarter.? 

Cons of Buying Down Interest Rate 

• Upfront Costs: A buy down requires additional cash at closing, which may be difficult if you’re already allocating funds for a down payment, moving costs, and other homebuying expenses. This higher closing cost could also impact your emergency savings. 
• Break-even Period: It may take several years to recoup the cost of the buy down through your monthly savings. If you sell the home or refinance before hitting the break-even point, you may not benefit financially from the buy down at all. 
• Opportunity Cost: The money spent on a buy down could potentially be allocated toward other important financial priorities. For instance, those funds could be used to pay off high-interest credit card debt, contribute to a retirement or investment account, build up an emergency savings fund, or even increase your down payment to reduce the loan amount and avoid mortgage insurance. It’s important to compare the long-term benefits of a buy down to these alternative uses of your money. A Direct Mortgage Loans loan officer can help you evaluate the best use of your funds and determine whether a buy down or another financial strategy better supports your short- and long-term goal. 

Buy Down Interest Rate: FAQ’s 

Is it better to buy down the interest rate or lower the home price? 

Both strategies reduce your overall borrowing costs, but in different ways. Buying down the rate helps lower monthly payments and provide long-term interest savings. Lowering the home price, on the other hand, reduces the loan amount upfront, which could also lower your monthly payments but may have a bigger impact on your cash-to-close. If you plan to stay in your home for a long time, a buy down may offer more cumulative savings. If you’re short on cash for closing, a price reduction might be more beneficial. 

For example, imagine you’re purchasing a home for $300,000 with a 30-year fixed mortgage and putting 10% down. If the seller reduces the price by $10,000, your new loan amount becomes $261,000 instead of $270,000. At a 6.5% interest rate, this reduction could lower your monthly principal and interest payment by approximately $64. 

Alternatively, if you apply that same $10,000 toward a rate buydown, you could potentially lower your interest rate by around 1%, depending on pricing. If that dropped your rate from 6.5% to 5.5%, your monthly payment on a $270,000 loan would fall by about $175. In this case, the buydown provides more monthly savings, but only if you plan to stay in the home long enough to break even on the upfront cost 

Disclaimer: These figures are estimates and do not reflect actual quotes. Loan terms, interest rates, and monthly payments will vary based on creditworthiness, loan program, market conditions, and lender policies. Be sure to speak with a loan officer at Direct Mortgage Loans for personalized estimates based on your financial situation. 

If you plan to stay in your home for a long time, a buy down may offer more cumulative savings. But if you’re short on cash for closing, a price reduction might be more beneficial because it lowers both your loan size and your upfront closing costs. Direct Mortgage Loans can help you run the numbers for both scenarios and guide you to the option that aligns with your goals. 

How long does a buy down interest rate last? 

The length of a buy down rate period depends on the type of buy down. Temporary buy downs like the 1-0, 2-1, or 3-2-1 reduce your interest rate for a set number of years—typically one to three—before reverting to the full note rate. For instance, with a 2-1 buy down, your interest rate might be 4% the first year, 5% the second year, and then return to the original 6% rate in year three. These are designed to ease the transition into a mortgage with lower initial payments. A permanent buy down, on the other hand, applies a reduced interest rate for the full term of the loan. This is achieved by paying points at closing and can significantly lower your monthly payment and overall interest paid over 15 or 30 years. Direct Mortgage Loans can help you compare both options side-by-side to determine which structure better supports your financial plans. 

Can I buy down the interest rate on an investment property? 

Yes, in many cases you can buy down the interest rate on an investment property, but there are a few extra considerations. Not all lenders offer buy down options for investment properties, and those that do may have stricter guidelines. For example, the cost per point might be higher, or the amount of reduction in rate may be less than what is typically offered for a primary residence. 

Additionally, lenders may limit the number of points you’re allowed to purchase or require a larger down payment when using a buy down strategy for an investment property. These policies are designed to account for the added risk that investment properties carry. 

Direct Mortgage Loans could help you navigate these details and evaluate whether a buy down is financially beneficial for your investment goals. Their team will assess the specific loan program, calculate potential savings, and help you structure the most cost-effective financing plan possible. 

Can you buy down an interest rate on an FHA or VA loan? 

Yes, FHA and VA loans both permit interest rate buy downs. However, there are specific guidelines and limitations on how the buy down can be structured and who can pay for it. For instance, in many cases, the seller or builder may cover the cost as part of concessions. 

What’s the best time to buy down interest rate? 

The best time to consider a buydown is when interest rates are relatively high, as the potential for savings is greater with a larger rate reduction. If you anticipate staying in the home for several years or throughout the life of the loan, a buydown could provide significant financial benefits by lowering your monthly mortgage payments and reducing total interest paid. Buydowns are also an attractive option if you have additional funds available at closing or if you receive seller concessions, which can help cover the cost of the buydown. In fact, many sellers in today’s market are willing to contribute toward buydowns as part of negotiations, making this strategy even more accessible. Direct Mortgage Loans can help you structure your financing in a way that incorporates seller assistance and ensures the buydown is financially worthwhile. 

Can I buy down interest rate after closing? 

In most cases, no, you cannot buy down the interest rate after closing. Buy downs are typically structured into the original loan terms and paid at the time of closing. This is because they directly impact the loan’s interest rate and amortization schedule from the start. Once your mortgage is finalized and funded, changes to the interest rate—such as through a buy down—are no longer allowed. To reduce your rate after closing, you would need to refinance your loan, which involves a new mortgage application, updated financial review, and another closing process. Direct Mortgage Loans can help you evaluate whether a buy down at closing, or a future refinance, would make the most sense based on your long-term plans. 

Have more questions? Direct Mortgage Loans is here to help. Their team of experienced loan officers can guide you through the buy down process, explain the trade-offs, and make sure you have a clear understanding before making a decision. 

Eligibility and approval is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral and underwriting requirements. Direct Mortgage Loans, LLC NMLS ID# is 832799 (www.nmlsconsumeraccess.com). Direct Mortgage Loans, LLC office is located at 11011 McCormick Rd Ste 400, Hunt Valley, MD 21031.