Permanent vs. Temporary Mortgage Rate Buydowns
Which Strategy Could Save You More Money?
A mortgage rate buydown can reduce your monthly payment and make buying a home more affordable. However, not every buydown works the same way.
A permanent buydown lowers your interest rate for the life of the loan. A temporary buydown subsidizes a portion of your mortgage payment during the first one, two, or three years.
The right strategy depends on your budget, future plans, available seller concessions, and how long you expect to keep the mortgage.
Permanent Rate Buydown
A permanent buydown uses discount points paid at closing to secure a lower interest rate for the life of the loan.
The lower rate results in a lower monthly principal and interest payment for as long as you keep that mortgage.
Advantages of a Permanent Buydown
- You qualify using the lower rate
- Reduces your interest rate for the life of the loan
- Provides a lower monthly principal and interest payment
- Offers long term payment certainty
- Can generate significant interest savings over time
- May be a good choice if you expect to keep the mortgage for many years
Things to Consider
- The payment relief will not be as great as a temporary buydown in the first couple of years
- It can take several years for the monthly savings to recover the initial cost
- If you sell or refinance too soon, you may not reach your break even point
Temporary Rate Buydown
What if the seller could help pay your mortgage for the next year or two?
It is possible with a temporary buydown.
As part of the purchase negotiation, the seller agrees to contribute a lump sum at closing. The money does not go directly to you. It is placed into a special account and used by your loan servicer to subsidize a portion of your monthly mortgage payment.
This gives you a lower payment during the first one, two, or three years of the loan.
Your actual mortgage rate does not change. The funds in the buydown account temporarily reduce the payment you are responsible for making.
Advantages of a Temporary Buydown
- Provides immediate monthly payment relief
- Helps you ease into your new housing payment
- Can be funded through seller, builder, or lender concessions when permitted
- Gives you time to adjust to the expenses of homeownership
- May be helpful if you expect your income to increase
- Can provide payment relief while you wait for a potential refinancing opportunity
- Can make the seller’s contribution feel more valuable
Things to Consider
- The payment savings are temporary
- Your payment increases as each buydown period ends
- You should be comfortable making the full payment when the buydown expires
What Happens to Unused Buydown Funds?
If you sell the property or refinance the mortgage before all the buydown funds have been used, the remaining balance is generally applied toward your outstanding mortgage balance or loan payoff.
The funds are not normally handed directly to you as cash, and their exact treatment depends on your buydown agreement and loan program.
Potential Tax Benefit
Because the buydown funds are collected at closing and applied by the loan servicer, there may be a potential mortgage interest tax benefit.
The actual deduction depends on how the funds are reported, whether you itemize deductions, and your individual tax situation. Always consult a qualified tax professional for guidance.
Which Buydown Is Better?
A permanent buydown may be a better choice if you plan to keep the mortgage beyond the break even point and want the security of a lower payment for the life of the loan.
A temporary buydown may be better if you want greater payment relief during the first few years or believe interest rates may decline in the near future, potentially creating an opportunity to refinance.
The best choice can depend on:
- The cost of the buydown
- The monthly payment savings
- The break even point
- The amount of available seller concessions
- How long you expect to own the home
- How long you expect to keep the mortgage
- When and if you think you might refinance
A Temporary Buydown vs. a Price Reduction
Many buyers automatically ask the seller to reduce the price. However, a temporary buydown may produce considerably more monthly savings during the first few years than a comparable price reduction.
Before deciding how to use a seller concession, it is important to compare both options side by side.
Let’s Run the Numbers
There is no single buydown strategy that is right for every buyer.
I can compare a permanent buydown, temporary buydown, and price reduction so you can see the upfront cost, monthly savings, break even point, and long term financial impact of each option.
Do not simply chase the lowest advertised rate. Let’s build the mortgage strategy that best supports your budget and financial goals.
Contact Kurt Kessler today to receive your personalized buydown analysis.