United States
Hong KongTemporary vs. Permanent Mortgage Rate Buydowns
A temporary buydown uses funds set aside to reduce the borrower’s scheduled payments for a limited period; the mortgage note still reflects the contractual rate and payment terms.
More key points
- A permanent buydown generally uses discount points to reduce the note rate for the loan term.
- They have different costs, disclosures, qualification rules, and effects after the temporary subsidy ends.
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The phrase “buy down the rate” can describe two different arrangements. One lowers the note rate for the life of the loan; the other temporarily subsidizes some early payments. Borrowers should compare the written note, payment schedule, funding source, and full cost rather than comparing only the first monthly payment.
Temporary buydown
A temporary buydown account is funded at or before closing, often by a seller, builder, lender, employer, or borrower when the program allows. Funds are applied over a limited schedule to reduce the borrower’s early payments. In a common 3-2-1 structure, the scheduled payment is calculated using a rate three percentage points below the note rate in year one, two points below in year two, and one point below in year three. The actual note rate and full contractual payment remain in the loan documents.
Permanent buydown with discount points
Discount points are upfront charges paid in exchange for a lower interest rate, subject to the lender’s pricing. Because the note rate itself is lower, the reduced contractual payment generally continues for as long as the loan remains under those terms. The borrower compares the upfront cost with expected interest savings and the time they expect to keep the loan.
The temporary payment will step up
When subsidy funds are exhausted, the borrower owes the payment required by the note. The payment can rise even though the loan is fixed-rate; this is not necessarily an adjustable-rate change. Under Fannie Mae’s current Selling Guide, loans with temporary buydowns are qualified using the note rate, not the bought-down rate; other investors and programs may set their own requirements.
Questions before comparing offers
- What is the note rate and full contractual payment?
- Who funds the buydown, and what happens to unused funds if the loan pays off early?
- How long does the subsidy last and when does each step-up occur?
- What is the upfront cost of points, and how long to break even?
- Does the investor permit the structure for this loan type and transaction?
Key takeaway
A temporary buydown changes early out-of-pocket payments through a finite subsidy; discount points generally change the note rate. Always explain the full note payment and the date the reduced payment ends.
Common questions
Does a temporary buydown change the mortgage’s note rate?
In a typical temporary subsidy plan, no. The note keeps the contractual rate; subsidy funds lower early scheduled payments.
Can a borrower qualify using only the temporary reduced payment?
Not always. Fannie Mae requires qualification at the note rate for covered loans with a temporary buydown; consult the applicable investor and program rules.