Who pays for a
rate buy-down?
A plain-English guide to how mortgage buy-downs work, who funds them, and when they make sense for buyers and refinancers.
~0.25%
Rate reduction per discount point
~1%
Of loan amount per point (upfront cost)
6%
Max seller concession (FHA/conventional)
What is a rate buy-down?
A rate buy-down is an upfront payment — made by the borrower, seller, builder, or lender — that lowers the mortgage interest rate either permanently (for the life of the loan) or temporarily (for the first 1–3 years). The money is deposited into an escrow account; the lender draws from it each month to make up the difference between the bought-down rate and the note rate.
Permanent vs. temporary buy-downs
Permanent (discount points)
Each discount point costs 1% of the loan amount and typically reduces the note rate by ~0.25% for the entire loan term. On a $400,000 loan, 1 point = $4,000 upfront; your rate drops from, say, 6.5% to 6.25% — permanently. This makes sense when you plan to stay in the home past the break-even point (usually 3–6 years).
Temporary (2-1, 1-1, 1-0 buy-downs)
A temporary buy-down reduces the rate for the first 1–3 years, then steps back up to the note rate. The most popular structures in 2024–2026:
2-1 buy-down at 6.5% note rate
| Period | Effective rate |
|---|---|
| Year 1 | 4.50%Subsidised |
| Year 2 | 5.50%Subsidised |
| Year 3+ | 6.50% |
1-0 buy-down at 6.5% note rate
| Period | Effective rate |
|---|---|
| Year 1 | 5.50%Subsidised |
| Year 2+ | 6.50% |
Who pays — and when?
This is the part most borrowers don't realise: you don't always have to pay for the buy-down yourself. In many purchase transactions the seller, builder, or lender picks up the tab as a negotiation incentive.
On a purchase
Seller (most common right now)
- When
- Buyer's market or when the seller wants to close faster
- How
- Seller contributes cash at closing as a 'seller concession'. The funds go into a buydown escrow account managed by the lender.
- Limit
- Conventional: 3% (LTV > 90%) · 6% (LTV 75–90%) · 9% (LTV < 75%) | FHA: 6% | VA: 4% | USDA: 6%
Builder / developer
- When
- New construction; builder uses buy-down as a sales incentive instead of reducing price
- How
- Builder pre-funds the escrow account at closing — common with 2-1 buy-downs on new builds
Lender (lender-paid)
- When
- Lender wants to offer a competitive payment; sometimes rolled into a 'no-cost' loan
- How
- Lender absorbs the buy-down cost, often by pricing a slightly higher note rate to offset it — a trade-off to discuss with your loan officer
Borrower
- When
- Borrower has cash reserves and wants the lowest possible payment from day one
- How
- Paid as closing costs — tax-deductible as mortgage interest on a primary residence in many cases (consult your tax advisor)
On a refinance
When you refinance there is no seller, so the options narrow:
Borrower (cash at closing)
- When
- You have reserves and want the lowest effective rate in early years
- How
- Deposited into escrow at closing, drawn down monthly by the lender during the buy-down period. Refunded if you refinance again.
Lender credit
- When
- You prefer a 'no-cost' refinance structure
- How
- The lender agrees to fund the buy-down escrow in exchange for a slightly higher note rate (typically +0.125% to +0.25%). Your loan officer can model both options side-by-side.
Employer / relocation package
- When
- Job relocation; some employers cover buy-down costs as part of a relocation benefit
- How
- Employer funds the escrow directly; treated as income — confirm tax treatment with your HR / tax advisor
Is a buy-down right for you?
Choose a temporary buy-down if…
- You expect your income to grow over the next 2–3 years
- You're stretching to qualify and need a lower initial payment
- The seller or builder is willing to fund it (free money!)
- You plan to refinance within 2–3 years anyway
Choose a permanent buy-down if…
- You plan to stay in the home for 5+ years
- You have cash reserves and want a fixed lower payment forever
- You're refinancing and want to lock in the lowest possible long-term rate
- The break-even period is under 4 years (use the calculator below)
Skip the buy-down if…
- You're likely to move or sell within 2 years (won't recoup costs)
- You need cash reserves for emergencies or renovations
- Rates are expected to fall — you may refinance to a lower rate anyway
This article is for educational purposes only and does not constitute financial, tax, or legal advice. Rate reductions per point vary by lender, loan type, and market conditions. Consult a licensed loan officer for personalised pricing. Seller concession limits are subject to change and may vary by lender guideline.