Rate buydowns can be permanent or temporary, and the difference turns on whether the lower rate is written into your loan or paid for separately through a subsidy. A temporary buydown reduces your monthly payment for the first one to three years using money deposited in an escrow account at closing, but the interest rate on your promissory note never changes. A permanent buydown, bought with discount points at closing, lowers the rate printed on the note itself for the entire life of the loan. Each path has its own cost, savings timeline, and consequences if you move or refinance before the math works in your favor.
How a Temporary Buydown Works
A temporary buydown lowers your effective interest rate for the first one to three years of the mortgage. The funding comes from a lump sum deposited into a separate escrow account at closing, and each month the servicer draws from that account to cover the gap between what you pay and what the full note rate requires. The money can come from the seller, builder, lender, your employer, or you as the borrower, though seller-funded buydowns are the most common and count as a seller concession.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
Three structures dominate the market:
- A 2-1 buydown sets your effective rate two percentage points below the note rate in year one, one point below in year two, and the full note rate from year three onward.
- A 3-2-1 buydown starts three points below the note rate and steps up by one point each year, reaching the full rate in year four.2Federal Housing Finance Agency Office of Inspector General. Temporary Interest Rate Buydowns Dashboard
- A 1-0 buydown drops your rate one point below the note rate in year one only, then adjusts to the full rate in year two.
None of these change the rate on your promissory note. The note rate stays the same for the full term, and the subsidy simply covers part of your payment during the buydown window. Once the escrow runs out, you pay the full amount with no further help.1U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
Temporary buydowns are designed primarily for fixed-rate loans. Fannie Mae restricts temporary buydowns on adjustable-rate mortgages, and the VA limits them to fixed-rate purchase loans, cash-out refinances, and interest rate reduction refinancing loans.3Fannie Mae. Temporary Interest Rate Buydowns If you are considering an ARM, this type of buydown may not be available.
How a Permanent Buydown Works
A permanent buydown works through discount points. You pay a fee at closing and the lender writes a lower rate into your promissory note, where it stays for the full term of the loan, whether that is 15, 20, or 30 years. One point costs 1% of the loan amount and typically reduces your rate by about 0.25%, though the exact reduction varies by lender and market.4Internal Revenue Service. Topic No. 504, Home Mortgage Points
On a $400,000 mortgage, one point costs $4,000. Two points would run $8,000 and might cut your rate by roughly half a percentage point. The reduced rate is the actual contract rate, not a subsidy masking a higher one, so every monthly payment for the life of the loan reflects it, and the amortization schedule is built around it from day one.
The Break-Even Calculation
The real question with discount points is whether you will keep the loan long enough to earn back the upfront cost. Divide the total points paid by the monthly payment savings they produce, and the result is the number of months to break even.
Say you pay $4,000 for one point and it saves you $65 a month. Your break-even point is roughly 62 months, just over five years. Sell, refinance, or pay off the loan before then and you lose money on the points. Stay past that mark and every additional month is pure savings. Owners who keep a home for many years benefit the most; those who may move or refinance within a few years often come out behind.
How Lenders Qualify You
One difference catches many buyers by surprise. With a temporary buydown, Fannie Mae requires you to qualify at the full note rate, not the reduced rate you will actually pay in the early years.5Fannie Mae. Qualifying Payment Requirements A temporary buydown does not help you qualify for a larger loan. Your debt-to-income ratio is measured against the payment you will owe after the buydown expires.
Permanent buydowns are the opposite. Because the points genuinely lower the note rate, the lender qualifies you at that reduced rate. Even a modest rate cut can shift your monthly payment and your debt-to-income ratio enough to change how much you are approved to borrow.
What Happens If You Sell or Refinance Early
If you refinance or sell while a temporary buydown is still active, the remaining funds in the subsidy account do not disappear. Under Fannie Mae guidelines, those funds are either credited toward your loan payoff balance or returned to you or the lender, depending on what the buydown agreement specifies.3Fannie Mae. Temporary Interest Rate Buydowns If the buyer assumes the mortgage, the remaining funds may continue to be used under the original terms. In foreclosure, the funds go toward reducing the mortgage debt.
Permanent points offer no refund. The money you paid at closing bought a lower rate, and that rate applies only as long as the loan exists. Pay the loan off early through a sale, refinance, or lump-sum payment, and the interest savings you would have earned over the remaining years are gone. This is why the break-even calculation matters. Refinance at month 30 when your break-even point was month 62, and you spent $4,000 to recover roughly $1,950.
Tax Treatment Is Not the Same
Discount points paid to buy your primary home are generally deductible as mortgage interest in the year you pay them, if you meet a set of IRS conditions. The loan must be secured by your main home, paying points must be an established practice in your area, the amount cannot exceed what is typically charged locally, and you must have put in enough of your own funds at or before closing to cover the points.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Points paid on a refinance follow different rules. You generally cannot deduct them in full in the year paid; instead, you spread the deduction over the life of the new loan. An exception applies if part of the refinance pays for substantially improving your main home, in which case the portion of the points tied to the improvement may be deductible in the year paid.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
When the seller pays points on your behalf, you can still treat them as if you paid them and deduct them under the same rules. You then have to reduce your home’s cost basis by the amount of the seller-paid points, which can increase your taxable gain when you eventually sell.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
The deduction only helps if you itemize. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your total itemized deductions do not clear that threshold, paying points produces no tax benefit.
Temporary buydown subsidies funded by the seller are handled differently. The IRS instructs lenders not to report seller-paid buydown interest on Form 1098, and sellers generally treat these payments as a selling expense rather than mortgage interest passed through to the buyer.8Internal Revenue Service. Instructions for Form 1098
Which One Fits Your Situation
A temporary buydown works best when you expect your income to grow in the next few years and want lower payments while you settle in. It can also be attractive in a market where sellers are offering buydown funds as a sales incentive, since the cost comes out of their proceeds. Just remember two things: you qualify at the full note rate, and the long-term interest cost is not reduced at all. Once the subsidy runs out, your payment is what it would have been without the buydown.
A permanent buydown through discount points fits borrowers who plan to stay well past the break-even point and want to lock in lower payments for the life of the loan. The savings compound, the lower rate reduces both monthly payments and total interest over 15 or 30 years, and the lender uses the reduced rate when sizing your loan. The trade-off is a larger cash outlay at closing with no refund if your plans change. Weigh whether you would actually benefit from the tax deduction, how long you realistically expect to hold the mortgage, and whether that same money might do more work as a larger down payment, lowering your loan-to-value ratio, cutting the balance the rate applies to, or eliminating private mortgage insurance.