What is a Permanent Rate Buydown?
A Permanent Rate Buydown is a financing technique where a borrower pays an upfront fee — commonly referred to as “discount points” — to lower their mortgage interest rate for the entire life of the loan.
Unlike temporary buydown options, where the interest rate is reduced only for the first few years (like the popular 2-1 buydown), a permanent rate buydown locks in savings for 15, 20, or even 30 years.
In today’s volatile interest rate environment, a permanent rate buydown can offer a smart way to reduce monthly costs, hedge against rising rates, and create long-term financial stability.
How Does a Permanent Rate Buydown Work?
Here’s a simple breakdown:
- You pay discount points at closing: Each point typically costs 1% of your total loan amount.
- Each point reduces your rate: Generally by about 0.25%, though this varies depending on your lender and market conditions.
- The lower rate lasts the entire term: No jumps, no surprises — permanent savings every month until the loan is paid off.
For example, if you’re borrowing $400,000:
- 1 point would cost $4,000
- That point might reduce your interest rate from 7.00% to 6.75%
Sometimes, sellers, builders, or even lenders offer to pay for a buydown as part of promotional deals.
Real-Life Example of a Permanent Rate Buydown
| Scenario | Without Buydown | With Buydown |
|---|---|---|
| Loan Amount | $400,000 | $400,000 |
| Interest Rate | 7.00% | 6.50% |
| Monthly Principal & Interest | $2,661 | $2,528 |
| Discount Points Paid | $0 | 2 points ($8,000) |
| Monthly Savings | — | $133 |
| Break-Even Time | — | About 5 years |
After about 60 months, the borrower recoups the $8,000 paid in points through monthly savings — and every month after that is pure gain.
Why Consider a Permanent Rate Buydown?
- Significant Long-Term Savings: Over a 30-year loan, even a small reduction in rate could save tens of thousands of dollars.
- Predictable Monthly Payments: Helps you budget confidently for decades.
- Competitive Advantage: Lower monthly obligations can make expensive homes more affordable.
- Potentially Easier Loan Approval: Lower payments improve debt-to-income ratios, which lenders closely evaluate.
For buyers intending to stay put for a while, the benefits of a permanent rate buydown are hard to ignore.
Pros of Permanent Rate Buydowns
- ✅ Lower monthly mortgage payments for life
- ✅ Shield against future interest rate hikes
- ✅ Easier household budgeting and cash flow management
- ✅ Greater total loan savings
- ✅ Often available for various loan types (conventional, FHA, VA)
Cons of Permanent Rate Buydowns
- ❌ High upfront costs at closing
- ❌ Breakeven period might not fit short-term ownership plans
- ❌ Opportunity cost (cash could be used elsewhere)
- ❌ Potential wasted money if you refinance too soon
- ❌ Not ideal if rates drop significantly after you lock in
When a Permanent Rate Buydown Makes the Most Sense
This strategy fits best when:
- 📍 You plan to stay at least 5–7 years in your new home
- 📍 You have available cash reserves beyond the down payment and emergency savings
- 📍 You expect rates to rise or stay elevated
- 📍 You want to maximize long-term housing affordability
If you’re unsure about your future plans, it’s smart to calculate your break-even period carefully with your lender.
How to Calculate Your Break-Even Point
Figuring out whether a permanent buydown is worth it is simple math:
Break-even months = Total cost of points ÷ Monthly savings
Example:
- $8,000 in points ÷ $133 monthly savings ≈ 60 months (5 years)
If you sell, refinance, or move before reaching that break-even time, you might not fully benefit from the investment.
Permanent Rate Buydown vs. Other Options
| Option | Key Features | Best For |
|---|---|---|
| Permanent Rate Buydown | Pay upfront to lower rate permanently | Long-term homeowners |
| Temporary Rate Buydown | Lower rates for first 1-3 years only | Short-term cash flow improvement |
| Adjustable-Rate Mortgage (ARM) | Lower initial rate, future rate risk | Short-term or flexible homeowners |
Each option has pros and cons, and the right choice depends on your financial goals and time horizon.
FAQs About Permanent Rate Buydowns
How much does it typically cost?
One discount point usually costs 1% of the loan amount and cuts the rate by around 0.25%, but exact numbers vary by lender.
Can I roll the cost into my loan?
In some cases, yes — but it increases your loan balance and monthly payment slightly, reducing your upfront benefit.
Will the seller pay for a buydown?
Yes, especially in a buyer’s market. Sellers sometimes offer concessions to sweeten the deal.
Is a permanent buydown better than refinancing later?
It can be, especially if rates climb higher in the future. Locking in a lower rate now avoids refinance fees and uncertainty.
Can a permanent buydown be combined with other incentives?
Absolutely. Some buyers combine seller concessions, builder incentives, or employer homebuying programs with a buydown for maximum advantage.
Conclusion
A Permanent Rate Buydown is a powerful way to lock in mortgage savings for the entire life of your loan. If you have the upfront funds and a long-term ownership plan, buying down your rate can mean substantial savings and financial peace of mind.
However, it’s crucial to run the numbers carefully — consider your break-even period, future plans, and overall affordability before committing. Always work closely with a trusted mortgage advisor to find the strategy that fits your unique situation.