How to Buy Down Your Mortgage Rate in California

Buying down a mortgage rate lowers the interest rate on a loan, either for its full term or for the first year or two, in exchange for money paid up front. There are two distinct ways to do it, and they work differently enough that mixing them up leads to real confusion at the negotiating table. Discount points buy a lower rate for the life of the loan. A temporary buydown, like a 2-1 or 3-2-1, lowers the rate for a set number of years before it steps back up to the note rate. Both are worth understanding before an offer goes in, since who pays and how the funds get structured can change the math substantially.

A discount point costs 1% of the loan amount and buys a permanent reduction to the interest rate, typically somewhere around 0.25%, though the exact reduction depends on the lender and market conditions at the time. Points can be purchased in fractions, so a buyer isn’t limited to buying a full point at a time.

Because the rate reduction lasts for the entire loan term, points make the most sense for a buyer who plans to stay in the home and keep the loan for years, long enough for the monthly savings to outweigh the upfront cost.

A temporary buydown lowers the rate for a set number of years at closing, then steps up to the full note rate. The two most common structures are named for how the rate moves:

• 2-1 buydown: the rate is 2% below the note rate in year one, 1% below in year two, then moves to the full note rate in year three and beyond
• 3-2-1 buydown: the rate is 3% below the note rate in year one, 2% below in year two, 1% below in year three, then the full note rate from year four on

Both structures give a lower payment in the early years of the loan without changing the note rate the loan is actually written at. That distinction matters for qualification, since some programs still require the buyer to qualify at the full note rate rather than the reduced first-year rate.

A temporary buydown is funded through an escrow buydown account set up at closing. Whoever is paying for the buydown deposits the full subsidy amount into that account up front, and each month the account pays the difference between the reduced payment and the full note rate payment directly to the loan. The buyer’s payment is lower during the buydown period, but the loan itself is being paid at the full rate behind the scenes.

If the loan is refinanced or paid off before the buydown period ends, the unused funds remaining in the escrow account are typically applied to the loan balance rather than returned as cash. That’s a detail worth confirming with the lender before closing, since it affects how much benefit survives an early refinance.

A seller has real incentive to offer a buydown rather than simply lowering the price. A rate buydown can make a listing affordable to more buyers without changing the sale price on record for the neighborhood, which matters for comps on nearby listings the seller or a builder may still have on the market. It also tends to be a more effective incentive than an equivalent price cut, since a lower payment is what most buyers are actually shopping on, not the sale price itself.

A buydown, temporary or permanent, can be funded by more than one party:

• Seller-paid buydown: the seller funds the buydown as part of the purchase negotiation, which is common in a slower market or when a builder is trying to move inventory
• Builder-paid buydown: new construction builders frequently offer a buydown in place of a price reduction, since it can be a more effective incentive for moving a buyer’s payment into range
• Lender credit: some lenders offer a buydown funded through pricing rather than a separate cash contribution
• Buyer-paid: the buyer covers the cost directly, either through discount points or by funding the escrow buydown account out of pocket
• Agent commission credit: a real estate agent applies part of their commission toward the buydown, which is more common when an agent is motivated to keep a deal together or help a client bridge an affordability gap

A seller-paid buydown draws from the same seller concession allowance as closing costs, so it counts against the applicable cap rather than sitting outside it. An agent commission credit falls under the same interested party contribution umbrella and counts against that same cap. The full breakdown of those limits by loan type is covered in Seller Concessions: How Much Can a Seller Pay Toward Closing Costs?.

The answer depends heavily on who’s paying. When a seller or builder is funding the buydown at no direct cost to the buyer, it’s close to free money: two years of lower payments funded by someone else’s contribution, with no real downside beyond the qualification nuance mentioned above.

When a buyer is funding the buydown out of pocket, the calculation changes. At that point, the buyer is essentially prepaying part of the interest to lower payments temporarily, and it’s worth comparing that cost against simply buying discount points for a smaller but permanent rate reduction instead. A temporary buydown funded by the buyer only pays off if rates are expected to drop enough to refinance before the reduced period ends, or if the lower payment in years one and two solves a specific short-term cash flow need.

For discount points, the break-even period is the number of months it takes for the monthly savings from the lower rate to equal the upfront cost of the points. Dividing the cost of the points by the monthly payment savings gives a rough break-even point in months. A buyer who expects to hold the loan well past that point comes out ahead. A buyer who expects to sell or refinance sooner may not recoup the cost.

The same logic doesn’t map directly onto a temporary buydown, since the lower payments only last for the buydown period rather than the life of the loan. For a buyer-funded temporary buydown, the more useful comparison is against discount points on the same loan amount, weighing a smaller permanent reduction against a larger but temporary one.

Conventional, FHA, VA, and jumbo loans all generally permit both discount points and temporary buydowns. The mechanics don’t change much by program, though FHA and VA loans have their own rules for how a seller-funded buydown interacts with the seller concession cap for that program. A temporary buydown and discount points can often be combined on the same loan, as long as the combined cost stays within whatever funding source is paying for them.

Are points paid in cash or rolled into the loan amount?

Discount points are typically paid in cash at closing rather than financed into the loan balance. Rolling points into the loan amount is possible on some programs but increases the loan balance and the amount of interest paid over time, which works against the purpose of buying the rate down in the first place.

Can a temporary buydown be combined with discount points?

Often, yes. A buyer can pair a permanent rate reduction from discount points with a temporary buydown that lowers payments further in the first year or two, as long as whoever is funding each piece has the room to do so within applicable limits.

Are discount points tax deductible?

Discount points paid on a purchase of a primary residence are often deductible as mortgage interest in the year they’re paid, subject to IRS rules that can vary by situation. A tax professional is the right resource for how this applies to a specific return.

We run the numbers on points, seller-funded buydowns, and lender credits side by side before recommending one, since the right structure depends on how long a buyer plans to keep the loan and who’s actually funding the buydown.

Mike Trejo is the Broker/Owner of Bridgepoint Funding, a residential mortgage brokerage based in Pleasant Hill, California. With more than 20 years of experience in the mortgage industry, Mike has helped thousands of borrowers navigate the home loan process, including many healthcare professionals and travel nurses with non-traditional income profiles.

Mike founded Bridgepoint Funding in 2006 and is consistently ranked among the Top 1% of Mortgage Loan Originators nationwide. Reach out at (925) 478-8630 or visit bpfund.com.