Permanent Buydown vs Temporary Buydown vs Price Reduction

Explained on video, not in theory

Matt Wentz, Speak Straight Mortgage
NMLS 1852397 · Company NMLS 2426226

We price buydowns by hand against a price cut and show you both, on your actual file.

Every version of this question starts the same way. A seller has agreed to give up $12,108. What that money should buy is not a matter of taste, and the three answers are far apart by year ten.

One note on where the permanent number comes from. We priced it off our own wholesale sheet this morning rather than a rule of thumb, and the popular rule of thumb is wrong. A point does not buy a fixed quarter percent. The cost of each eighth is set rung by rung, and on today's sheet it ranges from a point buying 0.19% at the worst rung to 0.42% at the best.

And the good rungs move

None of the above is a permanent feature of the market. We keep every sheet we are sent, so we can show what the same product did over the last month.

So the specific rates on this page are today's, not a rule. The method survives, which is to read the ladder before choosing where to stop rather than assuming the round number is the deal.

The part almost everyone gets wrong

A temporary buydown does not change your loan. The note rate is the note rate, and the loan amortizes at it. The escrow account simply pays part of your payment for you, so interest accrues at the full rate the whole time and your principal comes down on exactly the schedule it would have without the buydown.

A permanent buydown is a different animal. The rate really is lower, so less of every payment goes to interest and more goes to principal. By month 24 the permanent branch has built $1,093 more equity than the temporary one, by month 60 it is $2,767 ahead, and over the full term it pays $74,581 less interest.

That is the honest trade. The temporary buydown buys cash flow and nothing else. It is not building anything for you, and the money runs out on a date you can circle on a calendar. That is fine if cash flow is the problem you have. It is the wrong tool if it is not.

Counting everything: cash paid plus what you still owe

This section is for buyers who expect to sell or refinance, or who simply want the total-dollars answer. If you are buying a payment and staying put, skip to the verdict. The test here adds your down payment, every dollar paid, and the balance still owed. Lower is better.

Start with the goal, not the math

Everything above is arithmetic, and arithmetic cannot tell you which answer is right. What decides it is what you are actually trying to accomplish. Ask that first and the structure falls out of it.

Notice how rarely the answer is decided by total cost over thirty years. Most people are buying a payment, not a position. They are not selling in four years, they are not watching their amortization schedule, and the number that matters is what leaves the account on the first of the month. For them the net-position table is interesting and not decisive.

What the math says, and what lets you sleep

There are two answers to this question and they are often different. The math answer is above: at month 58 the permanent buydown passes everything and never looks back. The comfort answer is the one people actually sign, and it is not irrational.

A buyer who just emptied their savings for the down payment does not experience $667 a month in year one as a suboptimal allocation of a concession. They experience it as breathing room. Someone else looks at a payment that steps up $2,765 to $3,091 to $3,432 on a fixed schedule and cannot get comfortable with the third number, so the permanent buydown is right for them even if they move in four years and the math disagrees.

And the math is less certain than it looks. Month 58 assumes you keep this loan and that rates behave. If rates fall a point in two years and everyone refinances, the permanent buydown was the wrong answer and the temporary was right, and there is no way to know that today. Every crossover on this page is a precise answer to an uncertain question. Whether a payment that steps up in year three will keep you awake is an imprecise answer to a certain one, and you are the only person holding that information.

Both are defensible. What is not defensible is a lender running the optimization, announcing the winner, and never asking which payment you can live with. The only genuinely wrong answer here is a structure you resent in month 25, and no spreadsheet can find that for you.

The clearest example of this is not a buydown at all. For a good part of this year the adjustable-rate mortgages on our sheets were measurably better than the 30-year fixed for anyone whose plans fit inside the fixed period, and a small fraction of buyers took one. That was not ignorance. People were buying certainty, and certainty had a price they were willing to pay. Right now the gap has closed to about an eighth of a point on a 7/6, which is not worth much argument in either direction, and that shift is its own lesson about how quickly the mathematically better answer stops being the better answer.

None of which is us steering you away from the arithmetic. We like this conversation and we will go as far down it as you want, whether that is other holding periods or what a refinance in month 30 does to each option. Ask and we will build it on your actual file.

We should just be straight about what we see. The vast majority of buyers do not let the math frame this decision, and they are not making a mistake when they do not. They listen to the numbers, and then they choose the payment they can live with. Our job is to make sure both are genuinely on the table, not to talk you into whichever one wins a spreadsheet.

So we show you both. The math, honestly, including the parts that argue against what we would earn more on, and then the question of which number you want to see on the first of the month. You pick.

The refinance case deserves its own line, because it is the one people get backwards. If you genuinely expect to refinance inside a few years, a permanent buydown is the worst of the three. You would be paying for thirty years of a rate you intend to keep for two, and points do not refund. The temporary buydown is built for exactly that plan, and whatever escrow is left over lands on your principal when you pay the loan off.

Keeping it under five years, or cash is tight right now: take the temporary buydown. It hands you $12,108 across the first two years, when a new owner is replacing a water heater and buying a lawn mower, and it costs you nothing in equity. The net-position gap against the other two at month 24 is about $1,566 on a $550,000 purchase, which is a rounding error against having the cash.

Staying put, which most owners do: take the permanent buydown. It leads everything from month 58 and pulls away to $9,893 by year ten, while building $2,767 more equity by year five. Nobody feels it in month one, and that is exactly why it gets skipped.

The price reduction is the option that never wins big and never loses big. It is the right call when the appraisal is the problem, when you want the lower balance for a future refinance, or when the seller simply will not do anything else.

One thing worth saying plainly: on a low down payment the concession cap often makes this decision for you. At 5% down conventional allows 3%, and $12,108 is 2.2% of this price, so it fits. A 3-2-1 would not.

The four rules that decide whether this works

You qualify at the note rate, not the bought-down rate. On a temporary buydown the lender underwrites the payment at the full rate. The lower payment is real money in your pocket, but it does not stretch your approval by a dollar, and anyone telling you otherwise is describing a different product.

The money sits in an escrow account, and it is yours. The seller funds it at closing and the servicer draws from it each month to make up the difference. If you refinance or sell before the buydown runs out, the unused balance is applied to your loan, so it is not forfeited.

Concessions are capped, and the cap is what limits the buydown. On a conventional primary residence the seller can contribute 3% over 90% loan-to-value, 6% between 75.01% and 90%, and 9% at or below 75%. FHA allows 6%. VA is the one that gets quoted wrong. You will hear a flat 4%, but only some seller-paid items count toward it and others do not, so the total a seller can contribute on a VA loan is often higher than 4%. It is worth having someone work it out on your file rather than assuming the 4% is the ceiling. USDA allows 6%. A 3-2-1 on a low down payment often will not fit inside the cap, which is the single most common reason one gets restructured.

It is a negotiation, not a product you order. The seller is paying for it, so it competes with a price reduction and with closing-cost help. Which of the three is worth more to you depends on how long you keep the loan, and that is arithmetic we will run rather than guess.

Price all three on my file →

Keep going

• Temporary rate buydowns, all three compared
• The 2-1 buydown
• The 3-2-1 buydown
• The 1-1 buydown