Temporary Rate Buydown.
In plain English
A temporary rate buydown lowers your mortgage interest rate for a set early period, often the first one to three years, then the rate rises to the full note rate you actually signed for. The discount is funded upfront, usually by the seller or builder (and sometimes the lender), through a payment placed in escrow that covers the gap each month. A common version is the 2-1 buydown, where the rate is 2 percentage points lower in year one and 1 point lower in year two. After the buydown period ends, your payment jumps to the permanent rate and stays there.
01Why it matters
It can make the first couple of years more affordable, but you must be able to handle the higher full payment once the discount ends, because the loan does not get cheaper, it just delays the real cost.
02The math, step by step
Say your real rate is 7 percent. With a 2-1 buydown you pay as if the rate were 5 percent in year one and 6 percent in year two, then 7 percent from year three on. On a 300,000 dollar loan that lower early rate might save you a few hundred dollars a month at first, but in year three the payment rises to the full 7 percent amount. Confirm who funds the buydown and what your payment becomes after it ends, since the rate and structure are set by your lender or the seller funding it.
03What this is NOT
A temporary buydown is NOT the same as paying discount points. Points permanently lower your rate for the whole loan, while a temporary buydown only lowers it for the first few years before the rate returns to the full note rate.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice