How Interest Rate Buydowns Work — And When They're Worth It
With more inventory available in today's market, sellers are increasingly offering rate buydowns instead of straight price cuts — and buyers who understand how they work can negotiate significantly better outcomes. A buydown isn't free money, but structured well, it's often a smarter ask than a price reduction of the same size. TC Wu breaks down how buydowns actually work.
The Main Types of Buydowns
What each one actually does to your payment.
The 2-1 Buydown: Temporary Payment Relief
A 2-1 buydown reduces your rate by 2 percentage points in year one and 1 percentage point in year two, before returning to your full note rate for the remaining loan term. On a $400,000 loan at a 6.75% note rate, this could mean a payment around $2,086 in year one versus roughly $2,594 at the full rate — real short-term savings, typically funded by the seller or builder as a concession.
Permanent Buydowns: Discount Points for Life-of-Loan Savings
Unlike a temporary buydown, purchasing discount points permanently lowers your interest rate for the entire loan term. Each point generally costs 1% of the loan amount and reduces your rate by roughly 0.20% to 0.25%. This option makes more sense for buyers planning to stay in the home long term, since the upfront cost needs time to pay off through lower monthly payments.
Why a Buydown Often Beats an Equal-Sized Price Cut
A dollar spent on a rate buydown typically delivers more monthly payment relief than the same dollar spent reducing the purchase price, since the buydown directly targets your interest cost. A seller-funded buydown can also let the seller keep their sale price intact — useful for protecting neighborhood comps — while still meaningfully helping the buyer's affordability.
Who Pays, and How Much Is Allowed
Buydowns can be funded by the seller, builder, or lender, or paid by the buyer directly, and different loan types cap how much sellers can contribute — conventional loans generally allow 3% to 9% depending on your down payment, FHA around 6%, and VA around 4%. All conventional, FHA, VA, and USDA loans can accommodate buydowns, though specific program rules vary.
"When buyers reach for a price cut in negotiations, it's usually because it's the obvious move — not the best one. A seller-funded buydown almost always delivers more real payment relief for the same dollar amount. It's a lever more buyers should understand and ask for."— TC Wu, WPI Real Estate | Top Seattle Realtor
Buydown Types at a Glance
General comparison — figures illustrative, confirm exact numbers with your lender.
| Buydown Type | Duration | Best For |
|---|---|---|
| 2-1 Buydown | 2 years, then full rate | Rising income, plans to refinance soon |
| 1-0 Buydown | 1 year, then full rate | Short-term cash flow easing |
| Permanent (Points) | Life of loan | Long-term buyers, staying 7+ years |
How to Decide If a Buydown Is Worth It
Four questions to ask before choosing.
How Long Do You Plan to Stay in the Home?
Permanent buydowns need years to pay off — temporary buydowns can make more sense if you expect to move or refinance sooner.
Do You Expect Your Income to Rise?
A 2-1 buydown works especially well if you expect income growth to offset the payment increase once the buydown ends.
Is the Seller Willing to Fund It?
Ask your agent to negotiate a seller-funded buydown as a concession — it's often a stronger ask than a price reduction of similar cost.
Have You Calculated Your Break-Even Point?
For permanent buydowns especially, know exactly how many months it takes to recoup the upfront cost through monthly savings.
Frequently Asked Questions
Common buydown questions answered by TC Wu.
Structure a Smarter Offer
Let TC Wu help you negotiate the right financing terms — including rate buydowns — for your next purchase.
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