What Is a Rate Buydown
A rate buydown is simple: you pay money upfront to reduce your interest rate.
Permanent buydown, also called discount points. You pay a one time fee at closing. Each point costs 1 percent of your loan amount. In return, your rate stays lower for the whole life of the loan.
Temporary buydown, such as a 2-1 or 3-2-1. The money is paid at closing, most often by the seller or builder. Your rate is lower for the first two or three years. Then it steps up to the full rate on your loan.
Most buyers and builders in Houston are talking about temporary buydowns because of how markets currently work and because builders and sellers offer to pay for them.
Permanent Buydown Math
Points cost you money at closing. In return, your monthly payment is lower. The question is how long the lower payment takes to earn back what you paid.
Find Your Break Even in Three Steps
Step 1. Find what the points cost on your Loan Estimate.
Step 2. Find how much lower your monthly payment is with the points.
Step 3. Divide the cost by the monthly savings. The answer is how many months it takes to earn the cost back.
If you plan to keep the loan longer than your break even, points can pay for themselves. If you might sell or refinance before then, you may lose money on them. Brandon runs this math on your real Loan Estimate, so you see your own numbers.
When it makes sense. You plan to keep the loan past your break even, you have the cash at closing, and you want a lower payment for as long as you own the home.
When it does not. You might move or refinance before your break even, your closing costs are already high, or you would rather keep the cash for repairs or an emergency.
2-1 Temporary Buydown Explained
This is the buydown builders and sellers offer most often. Here is how it works.
How a 2-1 Buydown Works
Year 1. Your rate is lowered, so your payment is at its lowest.
Year 2. Your rate goes up part of the way, so your payment goes up some.
Year 3 and after. You pay the full rate for the rest of the loan.
What the name means. The 2 and the 1 tell you how many percentage points lower your rate is in year 1 and in year 2.
Where the money comes from. The money is paid at closing, most often by the builder or seller. A lender can also pay for one. The money goes into an account. It fills the gap in your payment during the first two years.
What it costs. The cost is about equal to the total payment savings over those two years.
How you qualify. Most loans qualify you at the full rate, not the lower year 1 rate. That way the lender checks that you can qualify for the full payment before you close.
Who pays. Builders often pay for a 2-1 buydown as an incentive to sell a home. On a resale home, you can ask the seller to pay for one as part of your offer. Each loan type limits how much a builder or seller can pay toward your costs.
3-2-1 Temporary Buydown
Higher upfront cost, more savings early. Still typically paid by builder or seller.
How a 3-2-1 Buydown Works
Years 1, 2, and 3. Your rate starts at its lowest and steps up each year, so your payment steps up too.
Year 4 and after. You pay the full rate for the rest of the loan.
What the name means. The 3, 2, and 1 tell you how many percentage points lower your rate is in each of the first three years.
What it costs. It costs more than a 2-1 buydown. Your rate starts lower, and the help lasts one year longer. The cost is about equal to the total payment savings over those three years.
When to ask for it. You are buying a new construction home, the builder is offering incentives, or the market is soft and the seller is motivated. Ask.
Seller-Paid Buydowns in Houston
When homes take longer to sell, buyers have more room to ask for help with costs. A buydown is one thing you can ask for.
What you can ask for. In addition to or instead of a price reduction, ask the seller to buy down your rate for 2-3 years. Builders are already doing this. Resale sellers can too.
Seller Concession Limits
Conventional loans: On a home you will live in, seller help is capped at 3, 6, or 9 percent. The cap is figured on the price or the appraised value, whichever is lower. The cap goes up as your loan to value goes down.
FHA: Capped at 6 percent of the price.
VA: Capped at 4 percent of the home's value on the VA appraisal. Normal closing costs do not count toward this cap. A buydown does count.
Seller help can pay your closing costs and a buydown, up to your loan's cap. Brandon checks your Loan Estimate and shows you how much room is left for a buydown.
Negotiating leverage. "I will come in at list price if you offer a 2-1 buydown" is a reasonable ask in today's Houston market. Sellers benefit because their home sells. You benefit because your payment is lower early.
Related: FHA Loans Houston | VA Loans Houston | Conventional Loans Houston
Builder Buydowns in Houston's Growth Markets
New construction in Fulshear, Brookshire, Conroe, Tomball. Builders are competing hard for buyers. Buydowns are a standard part of the incentive package.
What builders offer:
- 2-1 buydown as standard incentive
- Builder closing cost credits (covers part of your closing costs)
- Incentives from the builder's preferred lender, if you finance with that lender.
- Lot discounts or pricing reductions
Compare the builder's lender with your own. A builder's preferred lender may offer a buydown or other incentives if you use it. Sometimes that is the better deal and sometimes it is not. Ask for that lender's Loan Estimate, then get one from me for the same home and the same buydown. Put the two side by side and compare the full cost.
How to evaluate. Ask the builder for the loan terms (rate, points, buydown structure) from their preferred lender. Get a quote from Brandon at the same terms. Compare apples to apples. Builder convenience is nice, but your pocketbook matters more.
Buydown vs Waiting for Lower Rates
If you are weighing a buydown against waiting because of the Fed, start with what the Fed's latest decision actually changes for a Houston buyer.
Here is the honest comparison. Nobody knows where rates will go next, so this compares what you know today.
Scenario 1: Buy Now with a 2-1 Buydown
Your payment is lower in year 1 and year 2.
In this case, the builder or seller pays for the buydown.
Each payment pays down part of your own loan.
You qualify at the full rate, so the lender has checked the full payment before you close.
Scenario 2: Wait and Hope Rates Fall
You keep paying rent while you wait.
Home prices can go up or down while you wait.
Rates can go up or down while you wait.
You do not build equity in a home of your own until you buy.
What it comes down to. Waiting is a bet on rates falling. You may pay less if they fall, and you may pay more if they rise. A buydown lowers your first payments no matter which way rates go. If rates fall later, you may be able to refinance, but a refinance has its own costs and you have to qualify again.
If a builder is paying for the buydown, ask what else you would give up to get it. Then compare the full cost of each offer.
Related: Houston Mortgage Rates for current rate information.
Frequently Asked Questions
Who pays for a rate buydown?
With points, you usually pay at closing. With a 2-1 or 3-2-1 buydown, the builder or seller often pays. When homes sell slowly, sellers are more willing to pay. When homes sell fast, you may have to pay for it yourself.
Is buying discount points worth it long-term?
It depends on how long you keep the loan. Divide what the points cost by how much they lower your monthly payment. That tells you how many months it takes to earn the cost back. If you plan to keep the loan longer than that, points can pay off. If you might move or refinance sooner, they may not.
Can I combine a rate buydown with down payment assistance?
Often, yes. Some Texas down payment help programs, like the ones from TSAHC, allow a 2-1 buydown paid by the builder, seller, or lender. Each program has its own rules. The buydown lowers your rate. The down payment help lowers what you bring to closing. Brandon checks your program's rules before you make an offer.
What happens if I refinance during a temporary buydown period?
Your buydown ends when you refinance. The new loan uses the rates lenders offer on the day you refinance. If that rate is higher than your lowered buydown rate, your payment can go up. Ask your lender what happens to any buydown money that is left. Only refinance during a buydown if you have a strong reason, such as paying off debt or taking cash out of your home.
Do all lenders offer buydowns?
Most lenders offer points. Not every lender offers a 2-1 or 3-2-1 buydown, and not every loan program allows one. Temporary buydowns are common on new homes. On a resale home, it depends on whether the seller will pay for it.
Is a permanent buydown better than accepting a higher rate and hoping rates drop?
Not always. Nobody knows where rates will go. Points lower your rate for the life of the loan. They pay off only if you keep the loan past your break even. Compare that with how long you plan to stay.
Lower Your Payment Today
Small changes in your rate change your payment every month. A 2-1 buydown lowers your payment for the first two years. If a builder offers one, compare it with the other incentives on the table before you choose. If you are buying a resale home, ask the seller to pay for one as part of your offer. If you are thinking about points, find your break even and compare it with how long you plan to keep the loan.
Brandon will show you the real numbers, compare builder offers to outside quotes, and help you decide whether points or a temporary buydown fit your situation. When you are ready to move, the right rate strategy gets you there.
Call Brandon at 832-997-1527 or visit brandonhuynh.net.
Related Resources
- Houston Mortgage Rates - Current rate environment
- First-Time Homebuyer Houston - Programs for first-time buyers
- Down Payment Assistance Houston - Help with upfront costs
- Conventional Loans Houston - Standard financing options
- FHA Loans Houston - Low down payment programs
- Mortgage Pre-Approval Houston - Start the process
Lower Your Payment Today.
At today's rates, every fraction of a percent matters. Brandon runs the buydown math for your specific deal. Permanent points, 2-1 buydown, seller concessions, builder incentives. You see the exact cost and savings before you decide. Free consultation, no obligation.
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If you're waiting for the right moment rather than shopping today, tell me what you're waiting on and I'll reach out when something actually changes for your situation. Not a newsletter, and not a rate prediction, because nobody honestly has one. Just a note from me when the numbers move somewhere worth a conversation.