Glossary term
Permanent Buydown
A permanent buydown is an upfront payment, often through discount points, that lowers a mortgage interest rate for the life of the loan.
Updated
Read time
What Is a Permanent Buydown?
A permanent buydown is an upfront payment that lowers a mortgage interest rate for the life of the loan. It is often done through discount points paid at closing by the borrower, seller, builder, or another permitted party.
The key feature is permanence. Unlike a temporary buydown, which subsidizes payments for a short period, a permanent buydown changes the rate used to calculate the borrower's regular principal-and-interest payment over the loan term.
Key Takeaways
- A permanent buydown lowers the mortgage rate for the life of the loan.
- It is commonly structured through discount points paid at closing.
- The tradeoff is higher upfront cost in exchange for lower monthly payments.
- The value depends on how long the borrower keeps the loan.
- It should be compared with using the same cash for reserves, down payment, or other closing needs.
How Discount Points Fit In
Discount points are prepaid interest. Paying points can reduce the rate offered by the lender, but the exact rate reduction depends on the lender, loan type, market conditions, and pricing at the time of lock. One point typically equals 1 percent of the loan amount, but one point does not always reduce the rate by the same amount.
A borrower considering a permanent buydown should compare the upfront cost with the monthly savings. If the borrower sells, refinances, or pays off the mortgage before reaching the break-even point, the buydown may not recover its cost.
Permanent Versus Temporary Buydown
Feature | Permanent buydown | Temporary buydown |
|---|---|---|
How it works | Upfront cost lowers the loan rate. | Subsidy lowers early payments only. |
Duration | Usually life of the loan. | Usually one to three years. |
Main benefit | Lower long-term payment. | Lower early payment. |
Main risk | Not keeping the loan long enough to benefit. | Payment rises when subsidy ends. |
Break-Even Context
A simple way to evaluate a permanent buydown is to divide the upfront cost by the monthly payment savings. That gives a rough break-even period. The calculation should also consider taxes, opportunity cost, refinancing likelihood, and whether the borrower would be better served by keeping more cash available.
Permanent buydowns can be useful for borrowers who expect to keep the mortgage for a long time and want a lower required payment. They are less compelling when the buyer expects to move soon, refinance quickly, or needs cash for repairs and reserves.
The Bottom Line
A permanent buydown trades upfront cash for a lower mortgage rate. It can improve long-term affordability, but only if the borrower keeps the loan long enough for the monthly savings to justify the closing cost.