One discount point on a $500,000 loan costs $5,000 and drops your rate by about 0.25%. That saves you roughly $80/month. Divide $5,000 by $80 and you get 62 months. Five years and change before you break even. Everything after that is money saved. Everything before it is money you could have used for something else.
That break-even calculation is the only thing that matters when deciding whether a buydown makes sense. The structure of the buydown, who pays for it, and how long you plan to keep the mortgage all feed into that one number.
Permanent vs. Temporary Buydowns
Permanent buydowns are discount points. You pay upfront at closing, your rate drops for the life of the loan. One point typically reduces the rate by 0.25%. The math is straightforward and the break-even usually lands between 48 and 65 months depending on the loan size and rate environment.
Temporary buydowns work differently. A 2-1 buydown means someone deposits cash into an escrow account at closing. That account subsidizes your payments for the first two years. Your note rate never actually changes. The escrow just covers part of the payment so you feel a lower rate temporarily.
The 2-1 is the structure most buyers and sellers are negotiating right now. On a $500,000 loan at 6.75%:
| Year | Rate You Pay | Monthly Payment | Monthly Savings |
|---|---|---|---|
| 1 | 4.75% | $2,608 | $635 |
| 2 | 5.75% | $2,918 | $325 |
| 3-30 | 6.75% | $3,243 | $0 |
Total cost of that 2-1 buydown: roughly $11,500. That money has to come from somewhere.
Who Should Pay for It
This is where most buyers get the analysis wrong. If you're the one writing the check for $11,500 after already covering your down payment and closing costs, you need to ask whether that money does more for you somewhere else. If putting an extra $11,500 toward your down payment gets you to 20%, you eliminate PMI entirely. On a $500K loan, PMI runs about $250/month. That's a guaranteed savings with no break-even period and no expiration date.
But when the seller or builder is funding the buydown, the calculation changes completely. A seller offering a $12,000 price reduction saves you maybe $65/month on your payment. That same $12,000 applied as a 2-1 buydown saves you $635/month in year one. Same dollar amount from the seller, dramatically different impact on your monthly budget.
Builders in California's new construction communities have been using this strategy for years. Walk into a development in the Inland Empire or Sacramento and the preferred lender is offering a 2-1 or 3-2-1 buydown as a standard incentive. Builders know that buyers compare monthly payments, not purchase prices. A $525,000 home advertised at $2,200/month in year one attracts more foot traffic than the same home at $3,100/month, even though the long-term cost is identical.
The Bet Behind a Temporary Buydown
A 2-1 buydown is a bet on one of two outcomes: either your income increases meaningfully in the next two years, or rates drop enough to refinance before the full payment kicks in.
The income bet is straightforward for certain borrowers. A medical resident becoming an attending, a new attorney approaching partner track, an engineer who just moved into a senior role. If your W-2 is going from $85K to $140K in the next 24 months, the 2-1 buydown is designed for exactly this scenario.
The refinance bet is the one most buyers are making, whether they've framed it that way or not. They took a mortgage at 7% in 2024, used a 2-1 to keep the payment manageable, and now they're watching rates closely. If rates fall into the low 6s, they refinance and the buydown did its job. If rates stay flat or rise, that year-three payment increase is real and the household budget needs to absorb it.
Neither bet is wrong, but knowing which one you're making changes how you evaluate the risk.
Permanent Points: Simpler Math, Longer Commitment
Permanent points don't involve escrow accounts or year-by-year payment changes. You pay upfront, your rate drops, and the savings are constant for 30 years.
Two points on a $450,000 loan costs $9,000 and drops the rate from 6.5% to 6.0%. Monthly savings: about $155. Break-even: 58 months. Sell in three years and you lost money. Stay ten and you're $9,600 ahead.
One point is the safer option for most borrowers. Half the cost, break-even around 30 months, and less downside if you move sooner than expected. Two or more points only make sense if you're genuinely settled, and "genuinely settled" means your job is stable, you're not likely to outgrow the house, and you have no reason to relocate. Most people overestimate how long they'll keep a mortgage.
Points are tax-deductible on a purchase. In the 24% bracket, a $5,000 point effectively costs $3,800 after the deduction. That brings the break-even down to about 24 months, which makes one point attractive even for borrowers who might move within five years.
Seller Concession Limits by Program
How much a seller can contribute toward a buydown depends on the loan type:
| Loan Type | Seller Concession Limit |
|---|---|
| Conventional (less than 10% down) | 3% of purchase price |
| Conventional (10-25% down) | 6% of purchase price |
| Conventional (above 25% down) | 9% of purchase price |
| FHA | 6% of purchase price |
| VA (buydowns specifically) | No limit |
VA is notably generous here. A VA buyer can negotiate a 3-2-1 buydown without touching the 4% cap that applies to other closing costs. This is one of the most underused benefits in VA lending.
One important rule applies across all programs: borrowers qualify at the note rate, not the bought-down rate. A 2-1 buydown doesn't help you afford a larger purchase in the eyes of the underwriter. They run your debt-to-income ratio at 6.75%, not 4.75%. The buydown makes your payment more comfortable, but it doesn't expand what you qualify for.
When a Buydown Doesn't Make Sense
If you're stretching to cover the down payment, spending additional cash on points is the wrong move. If you might sell within three years, the break-even math won't work in your favor. And if you can eliminate PMI by putting an extra 5% toward your down payment instead, that guaranteed $200-$250/month savings beats the conditional savings of a rate buydown.
The most important thing to watch for: a buydown being used to make an unaffordable house appear affordable. A payment optimization tool is useful when it reduces costs on a home you can already handle. It becomes dangerous when it's the only reason the monthly number works, because year three always comes.
One Number, One Decision
The break-even calculation drives every buydown decision. Divide the upfront cost by the monthly savings. Compare that number to how long you'll realistically keep the mortgage. If the break-even is shorter than your expected hold period, and especially if someone else is paying for it, the buydown works in your favor.
SRK CAPITAL can model permanent points, 2-1, and 3-2-1 scenarios against your specific loan amount. Get a buydown analysis or check current rate programs to see where the numbers land.