How to use the mortgage rate buydown calculator
- Enter the loan amount, the note rate and the loan term in years.
- Choose the buydown: 1-0 (one point below the note rate in year one), 2-1 (two points in year one and one in year two) or 3-2-1 (three, two, one).
- Read the payment for each year of the buydown, the monthly and yearly savings, and the total of those savings.
- That total is what it costs to fund the lower payments up front, and it also tells you how much payment shock to plan for when the buydown ends.
Formula
Payment = loan x r / (1 - (1 + r) to the power -n), with r the monthly rate and n the number of months
Reduced payment in year k = payment on the same loan and term at (note rate - points for year k)
Saved per month = note rate payment - reduced payment
Cost of the buydown = saved per month x 12, added up over the buydown years
The loan keeps accruing interest at the note rate. The difference between the two payments is the subsidy, so the balance follows the note rate schedule.
A $400,000 loan at 7% for 30 years with a 2-1 buydown
The payment at the 7% note rate is $2,661.21. In year one the rate is 5% and the payment is $2,147.29, which saves $513.92 a month or $6,167.04 for the year. In year two the rate is 6% and the payment is $2,398.20, saving $263.01 a month or $3,156.12.
Together that is $9,323.16, which is the cost of the 2-1 buydown if paid up front. From year three the payment is the full $2,661.21, which is $514 more a month than in year one.
How a temporary buydown works
A temporary buydown lowers the rate for the first year or two, and someone pays up front for the difference, often a seller or builder as a concession, or the borrower. The money sits in an account that tops up the payments you make. The note rate, the one in the loan, does not change.
Because the permanent rate is unchanged, a buydown is not the same as paying points to lower the rate for the whole loan. For that comparison, see the mortgage points calculator. To compare full loans, use the mortgage comparison calculator.
Planning for the full payment
The lower payments are temporary. Before relying on one, check that you could pay the note rate payment from the start, since income and expenses may not change as fast as the payment does. A buydown may also be more useful when you expect to refinance, though refinancing depends on future rates and credit and cannot be counted on.
Taxes, insurance and mortgage insurance are not part of these payments. The mortgage calculator shows the whole monthly cost.
Assumptions and limits
- The note rate and loan are your inputs. Example values are not current market rates.
- Each buydown year uses a level payment calculated for the full term at the reduced rate.
- The cost shown is the simple sum of the payment differences, without interest on the funding account or any lender charge.
- Taxes, insurance, mortgage insurance and closing costs are not modeled. This is not financial advice.
Frequently asked questions
What is a 2-1 buydown?
It lowers the interest rate by two percentage points in the first year and one point in the second year, then returns to the note rate from the third year.
How much does a 2-1 buydown cost?
It costs about the total of the payment savings in the first two years. On a $400,000 loan at 7% for 30 years that is $9,323.16.
Is a temporary buydown the same as buying points?
No. Points lower the rate for the entire loan and are paid by the borrower. A temporary buydown lowers it only for the first years, and the seller or builder often pays.
Why does the payment jump after the buydown?
The reduced payments only last for the buydown years. After that, the payment returns to the one for the note rate, which is higher than the payments you were making.