Mortgage Costs
Seller Paid Rate Buydowns
How temporary buydowns funded by a seller reduce your payment in the early years, how they are underwritten, and when they beat a price reduction.
Updated 2026-08-21| Applies to: Buyers negotiating concessions who want early payment relief rather than a smaller loan balance.
The short answer
A temporary buydown uses funds placed in an escrow account, often paid by the seller, to reduce your interest rate for the first years of the loan. Common structures are 1-0, 2-1 and 3-2-1, where the number represents the rate reduction in percentage points for each year. Qualification is generally based on the full note rate, not the reduced starting rate.
How the structures work
| Structure | Year 1 | Year 2 | Year 3 | Year 4 onward |
|---|---|---|---|---|
| 1-0 | 1% below note rate | Note rate | Note rate | Note rate |
| 2-1 | 2% below | 1% below | Note rate | Note rate |
| 3-2-1 | 3% below | 2% below | 1% below | Note rate |
Where the money goes
The buydown funds are deposited into an escrow account at closing and released each month to make up the difference between your reduced payment and the full note payment. Nothing about the note rate itself changes.
Why it often beats a price reduction
The same concession dollars applied to a price cut usually change the payment only slightly. Applied to a temporary buydown, they can reduce the first year payment meaningfully. If your constraint is the next twelve to twenty four months of cash flow, the buydown usually wins. If your constraint is the long term payment, a permanent buydown or a lower price wins.
Important cautions
- You are generally qualified at the full note rate, so the buydown does not increase your purchase power.
- Plan for the payment increase at each step up, and budget for the final payment from day one.
- If you refinance or sell early, unused buydown funds are typically applied to the loan rather than paid to you.
- Do not count on refinancing before the buydown expires, since future rates are unknowable.
If a seller offers a concession, ask me to price it both ways. I will show you the buydown payment schedule next to the price reduction so the choice is based on numbers, not on which sounds better.
Educational purposes only. Down payment assistance, grant and credit programs have their own eligibility rules, income and purchase price limits, occupancy requirements, funding availability and repayment terms, and program details change over time. All financing is subject to application, verification, applicable program guidelines and underwriting approval. Not a commitment to lend. Manny Oloyede | Mortgage Broker | NMLS 1824463 | Ultimate Mortgage Brokers LLC. Equal Housing Opportunity.
Common mistakes to avoid
- Budgeting around the year one payment instead of the final payment
- Assuming a buydown increases how much you qualify for
- Choosing a buydown when you actually need long term payment relief
- Planning to refinance before the buydown expires as the only exit
Frequently Asked Questions
People also ask
Is APR always higher than the interest rate?
Usually APR is equal to or higher than the interest rate because it factors in certain additional costs, though the exact difference depends on the fees included in the calculation.
Read: How to Compare Mortgage Rates the Right WayCan I buy a home with no money down?
It is possible through VA loans for eligible veterans and service members, or USDA loans for eligible properties and household incomes, though qualification requirements apply.
Read: How Much Down Payment Do I Need to Buy a Home?Are discount points tax deductible?
Points may be deductible in some circumstances, but tax treatment depends on your situation, so it is worth checking with a tax professional.
Read: Mortgage Points, Fees, and Lender Credits: What Do They Mean?Are closing costs the same for every loan program?
No. Some programs have specific limits on certain fees or allow different levels of seller contribution, so costs can vary by program even for the same purchase price.
Read: How Much Will My Closing Costs Be?Does locking my rate cost money?
Some lock periods are offered at no additional cost, while longer locks or certain float-down features may carry a fee depending on the lender and loan program.
Read: How Does a Mortgage Rate Lock Work?Can PMI be removed without refinancing?
Often yes. Once the loan balance reaches a certain percentage of the original or current home value and payment history qualifies, borrowers can typically request cancellation directly from their servicer without a refinance.
Read: Private Mortgage Insurance (PMI) ExplainedTerms used in this guide
- Buydown
- Paying money upfront to lower the interest rate, either temporarily for the first years of the loan or permanently for the full term.
Written by
Manny Oloyede, Mortgage Broker
NMLS #1824463 | Ultimate Mortgage Brokers LLC NMLS #2619461 | Licensed in OH | KY | NC | PA | SC | TN | TX
I have worked in mortgage lending since 2018 out of the Akron / Cuyahoga Falls Branch, helping buyers, homeowners and investors across Northeast Ohio and every state where I am licensed. These guides reflect the questions I answer most often, written the way I would explain them on a call.
Keep reading
Should I Buy Down My Rate?
How permanent points and temporary buydowns differ, how to run the break even math, and when paying for a lower rate is a poor trade.
Buying a HomeSeller Credits and Concessions Explained
What seller concessions can and cannot pay for, program contribution limits, how they appear at closing, and how to structure an offer that uses them well.
Mortgage CostsLender Credits vs Discount Points
How lender credits and discount points move your rate and cash to close in opposite directions, and how to choose based on how long you keep the loan.
Mortgage ProcessHow Does a Mortgage Rate Lock Work?
Understand how mortgage rate locks work, typical lock periods, what happens if a lock expires, and how float-down options function when offered.
Questions about your own numbers?
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