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Glossary · New Construction

Rate Buydown

The builder incentive of this cycle, paying points to cut the buyer's rate, temporarily or for good.

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Quick definition
A rate buydown pays money upfront (discount points) to lower a mortgage's interest rate — permanently, for the life of the loan, or temporarily (a '2-1 buydown': rate reduced 2 points the first year, 1 the second, full rate thereafter, with the difference pre-funded into an escrow). Builders made buydowns the signature incentive of this cycle, often via forward commitments with affiliated lenders — frequently worth more to a buyer than the equivalent dollars as a price cut, but only when the fine print holds.

Permanent vs. temporary

Permanent buydowns purchase a lower note rate outright — the payment relief lasts as long as the loan. Temporary buydowns (2-1, 1-0) fund the first years' payment difference from an escrow account; the note rate — and year-three payment — never changed. Know which one the flyer is advertising: 'payments from' math is usually the temporary kind.

Why builders love them

A buydown converts incentive dollars into monthly-payment headlines without cutting base price — protecting the community's comps (and appraisals on their own backlog). Via forward commitments, builders also buy rate blocks in bulk, sometimes offering rates the open market can't match, tied to using the affiliated lender. Compare the whole package: rate, fees, and price against an outside lender's terms.

Buydown vs. price cut

The honest comparison is arithmetic: lifetime (or expected-hold) interest saved vs. the same dollars off price — a smaller loan forever vs. a cheaper rate. Short expected ownership favors price cuts; long holds at high rate spreads favor permanent buydowns; refinancing hopes complicate temporary ones (an unused escrow balance typically credits back at payoff). Run both against your horizon before choosing.

Common questions.

What is a 2-1 buydown?
A temporary buydown: the effective payment rate is 2 points below the note rate in year one and 1 point below in year two, funded from an upfront escrow. From year three the full note rate applies — it never actually changed.
Is a builder buydown better than a price reduction?
It depends on your hold period and the numbers: compare interest saved over your expected ownership against the same dollars as a smaller loan. Long holds tend to favor permanent buydowns; short holds favor price.
What happens to buydown funds if I refinance early?
With temporary buydowns, remaining escrowed funds are typically credited at payoff — ask the lender to confirm treatment before closing.
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