When buying a home, mortgage interest rates play a huge role in determining affordability. Many lenders offer borrowers the option to “buy down” their mortgage rate, either temporarily or permanently, by paying discount points upfront. A Rate Buy Down Calculator helps you see exactly how much you can save on monthly payments and total loan costs with this strategy.

What Is a Rate Buy Down?

A rate buydown is an arrangement where a borrower pays extra upfront money (commonly called “discount points”) to reduce the mortgage interest rate.

There are two main types:

1. Permanent Buydown – A one-time payment lowers the interest rate for the entire loan term.
2. Temporary Buydown – The interest rate is reduced for an initial period (e.g., 2-1 buydown, where the rate is 2% lower in year one, 1% lower in year two, then normal afterward).

Lenders, home sellers, or builders may sometimes offer buydowns as incentives.

Formula for Rate Buy Down Savings

The calculator typically uses two formulas:

Monthly Mortgage Payment Formula:

M = P × [ r(1 + r)ⁿ ÷ ((1 + r)ⁿ − 1) ]

Where:

• M = Monthly payment
• P = Loan principal (amount borrowed)
• r = Monthly interest rate (annual rate ÷ 12)
• n = Total number of payments (loan term in months)

Buydown Savings Formula:

Savings = Monthly Payment Without Buydown − Monthly Payment With Buydown

If points are paid upfront:

Break-Even Period = (Cost of Buydown Points) ÷ (Monthly Savings)

How to Use the Rate Buy Down Calculator

1. Enter loan amount – The mortgage balance you plan to borrow.
2. Input interest rate – Your standard mortgage rate without buydown.
3. Enter buydown rate – The reduced rate after applying points.
4. Specify term – Loan length (15, 20, or 30 years).
5. Add points cost – If applicable, input upfront discount point fees.
6. View results – The calculator shows monthly payment savings, total interest reduction, and breakeven time.

Example Calculations

Example 1: Permanent Buydown

• Loan = $300,000
• Standard Rate = 6.5%
• Buydown Rate = 5.75%
• Term = 30 years

Monthly Payment Without Buydown = $1,896
Monthly Payment With Buydown = $1,750
Savings = $146/month

If discount points cost $6,000, breakeven = $6,000 ÷ $146 ≈ 41 months.

Example 2: Temporary 2-1 Buydown

• Loan = $250,000
• Rate = 6% standard
• Year 1 Rate = 4%
• Year 2 Rate = 5%
• Year 3 onward = 6%

Year 1 Payment = $1,193
Year 2 Payment = $1,342
Year 3+ Payment = $1,499

This helps new homeowners ease into payments.

Benefits of Using a Rate Buy Down Calculator

• Clarity – See exact payment differences with and without buydown.
• Decision-making – Determine if upfront costs are worth long-term savings.
• Budget planning – Manage affordability for the first few years.
• Negotiation tool – Understand incentives offered by builders or lenders.

Things to Consider Before a Buy Down

• Do you plan to stay in the home long enough to reach breakeven?
• Is the upfront cost affordable?
• Would the money be better used for a larger down payment?
• Are you choosing a permanent or temporary buydown?
• How do market rate changes affect your choice?

20 Frequently Asked Questions (FAQs)

1. What is a Rate Buy Down Calculator?
It’s a tool that estimates savings when you pay to reduce your mortgage rate.

2. What is a discount point?
A discount point is an upfront fee equal to 1% of the loan amount, used to lower interest rates.

3. How much does one discount point lower rates?
Typically about 0.25%, but it varies by lender.

4. What’s the difference between a temporary and permanent buydown?
Temporary reduces rates for a few years, permanent reduces them for the entire loan term.

5. Who pays for a buydown?
The borrower, seller, or builder may cover the cost.

6. How do I calculate break-even?
Divide the upfront cost of points by monthly savings.

7. Is a buydown always worth it?
Only if you stay in the home long enough to benefit from the savings.

8. Can I use a buydown for refinancing?
Yes, lenders may allow buydowns when refinancing.

9. Does a buydown affect my loan approval?
No, it only changes payment amounts, not eligibility.

10. Can first-time buyers use temporary buydowns?
Yes, many lenders offer them to ease early affordability.

11. What is a 3-2-1 buydown?
An arrangement where the rate is 3% lower in year one, 2% in year two, 1% in year three, then normal afterward.

12. Do all lenders offer buydowns?
Not all, but many provide them, especially in competitive housing markets.

13. Are buydown points tax-deductible?
Sometimes—consult a tax advisor for details.

14. Does a buydown change my loan balance?
No, it only affects the interest rate and payments.

15. Can sellers use buydowns as incentives?
Yes, sellers sometimes pay for buydowns to attract buyers.

16. Is a buydown better than a larger down payment?
It depends—larger down payments lower principal, while buydowns lower interest.

17. Does a buydown affect PMI (private mortgage insurance)?
No, PMI is based on down payment size, not interest rate.

18. How do I know if a buydown is right for me?
Use a calculator to compare breakeven against your expected homeownership duration.

19. Can VA or FHA loans include buydowns?
Yes, both VA and FHA loans allow temporary and permanent buydowns.

20. Is the Rate Buy Down Calculator free to use?
Yes, most online tools are free and instant.

Conclusion

The Rate Buy Down Calculator is an essential financial planning tool for homeowners and buyers considering mortgage savings options. By comparing standard payments against buydown scenarios, you can make informed decisions about whether paying points upfront or accepting a temporary reduced rate is worth the investment.