Can a Temporary Buydown Make Your Mortgage More Affordable?
Designed to make initial mortgage payments more manageable, a temporary buydown lowers the interest rate on a home loan for a limited period. Upfront funds are set aside in an escrow account and used each month to bridge the gap between the reduced rate and the permanent rate.
Borrowers make payments based on the discounted rate during the buydown period. When that period expires, the payment rises to reflect the loan's full note rate for the remainder of the repayment schedule.
How Does a Temporary Buydown Work?
With a temporary buydown, a lump-sum deposit (from a seller, lender, builder, or sometimes the buyer) offsets a portion of the interest due in the early years. The lender collects the full scheduled interest each month, while the buydown funds cover the difference between the reduced introductory rate and the final note rate. Borrowers must still qualify based on the permanent note rate.
What are the Types of Temporary Buydowns?
We offer eligible borrowers several structures for temporary buydowns:
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Seller-Paid Buydowns:
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3-2-1 Buydown: Lowers the note rate by 3% in year 1, 2% in year 2, and 1% in year 3. The permanent note rate applies from years 4–30.
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2-1 Buydown: Reduces the note rate by 2% in year 1 and 1% in year 2. The permanent note rate applies from years 3–30.
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1-0 Buydown: Lowers the note rate by 1% in year 1. The permanent note rate applies from years 2–30.
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Eligible borrowers must still qualify at the final note rate, not the reduced introductory rate.
What are the Benefits of a Temporary Buydown?
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Lower initial monthly payments can ease the transition into homeownership.
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Predictable payment schedule on a fixed-rate loan once the buydown period ends.
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Potential to preserve cash flow during the first years for moving costs, furnishings, or savings.
Temporary Buydown vs. Permanent Buydown
| Feature | Temporary Buydown | Permanent Buydown |
|---|---|---|
| How it works | Reduces the interest rate for an initial period (e.g., 1–3 years), then reverts to the original note rate. | Lowers the interest rate for the entire life of the loan through upfront points. |
| Upfront cost | Generally lower; prepaid subsidy covers the short-term rate reduction. | Higher; points paid at closing permanently reduce the rate. |
| Monthly payment impact | Payments start lower and increase as the buydown phase ends. | Consistently lower payments over the full term. |
| Best for | Borrowers expecting income growth or short-term ownership. | Long-term homeowners seeking maximum lifetime interest savings. |
| Refinance considerations | If you refinance early, unused subsidy may be forfeited per lender terms. | Benefit persists unless refinanced; sunk cost in points may not be recovered if selling soon. |
| Risk profile | Payment shock when buydown expires if budgets aren’t planned. |
Who Typically Pays for the Buydown?
Buydown funds can come from various sources depending on the transaction: sellers may contribute as a concession to attract buyers, lenders may offer promotional buydowns, builders may provide incentives on new construction, and in some cases buyers can fund them. Contribution rules and limits may apply based on loan type and program guidelines.
Benefits to the Seller:
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Attracts more buyers in a high-rate environment.
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Provides an alternative to reducing the list price.
Benefits to the Buyer:
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Lower initial interest rate and more affordable monthly payments.
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Fixed-rate stability once the buydown period ends.
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Potentially more upfront cash available for other expenses.
Potential Drawbacks to Consider
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Payments will increase to the permanent note rate after the buydown period ends.
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The upfront buydown cost may not be recouped if you sell or refinance early.
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Not all loan programs or properties are eligible; contribution limits and guidelines apply.
The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. This is not a commitment to lend.