Permanent vs. Temporary Rate Buydowns: What Buyers Need to Know
House hunting these days isn’t just about finding the right kitchen island or backyard. It’s also about finding ways to make your monthly payment work for your budget. One option you’ll hear about is the rate buydown — a way to temporarily or permanently lower your interest rate. Let’s break down the difference between a permanent buydown and a temporary buydown (like a 3/2/1) so you know how they play out.
Permanent Rate Buydown
This is the “set it and forget it” option. You (or sometimes the seller) pay upfront — usually by buying discount points — to reduce your interest rate for the life of the loan.
Example: Say you’re buying a $1,000,000 home with 20% down. Your loan amount is $800,000. At 6.45%, your principal and interest payment would be about $5,035/month. If you permanently buy down the rate by 0.5% to 5.95%, your payment drops to around $4,770/month. That’s over $3,000 a year in savings, every year you keep the mortgage.
This option shines if you’re planning to stay in the home long-term and want consistent, predictable savings.
Temporary Rate Buydown (3/2/1 Example)
Now let’s look at the “trial period” option. With a 3/2/1 buydown, your rate is reduced by 3% the first year, 2% the second, and 1% the third — before jumping back to the full rate in year four.
Using the same $800,000 loan at 6.45%:
- Year 1 (3% lower = 3.45%): about $3,570/month
- Year 2 (2% lower = 4.45%): about $4,030/month
- Year 3 (1% lower = 5.45%): about $4,525/month
- Year 4+ (full 6.45%): back to about $5,035/month
Important note: you must still qualify for the loan at 6.45%, even though your first three years are lower. Lenders want to be sure you can handle the full payment when the discount runs out.
The cost of the buydown is basically the interest you didn’t pay in those first three years — in this case, more than $20,000. Sometimes buyers cover this, but it’s common to negotiate for the seller to pay for some, or all, as a closing credit.
Which One’s Better?
- Permanent buydown: Best if you’re in it for the long haul and want lasting savings.
- Temporary buydown: Great if you expect your income to rise, plan to refinance, or just want easier payments while you get settled.
Both options can be smart tools, depending on your situation — and knowing how the numbers work makes you a stronger buyer. Of course, if you are currently pursuing buying a property then you should speak with your lender about what kind of rate buydown options are available to you.
