2-1 Mortgage Buydown vs Permanent Buydown: Cost Tradeoffs and Break-Even Math
Homebuyers often weigh a 2-1 mortgage buydown against paying points for a permanent rate reduction. The choice affects monthly cash flow, total interest paid, and how quickly upfront costs are recovered. This guide explains how each option works, what they typically cost, and how to run realistic break-even math using simple, traceable assumptions.
Home loan rate buydowns come in two common forms: a 2-1 temporary buydown that reduces your rate by 2 percentage points in year one and 1 point in year two, and a permanent buydown achieved by paying discount points at closing. Both aim to lower payments, but they do so on different timelines and with different tradeoffs in risk, liquidity, and total interest. Understanding these differences helps you structure a mortgage that fits your goals in the United States, whether you plan to stay for decades or refinance in the near term.
Financial planning for buydowns
A permanent buydown lowers the rate for the life of the loan in exchange for an upfront cost (points typically equal 1% of the loan amount per point). This favors longer holding periods, because monthly savings accrue indefinitely. A 2-1 buydown temporarily subsidizes the payment for two years; the rate then resets to the note rate. This can align with plans to refinance if rates fall or income is expected to rise. Time horizon, tax treatment of points, and expected refinancing probability all matter. Because tax rules vary and can change, verify current IRS guidance or consult a qualified tax professional.
Budget management with a 2-1 buydown
Temporary buydowns are often used to improve early cash flow. For example, on a $400,000, 30-year fixed loan at 7%, the principal-and-interest payment is roughly $2,661 per month. In a 2-1 structure, year one payments align to about a 5% rate (about $2,147), saving roughly $514 per month, and year two aligns to about 6% (about $2,398), saving about $263 per month. Those savings can ease moving costs or help build reserves. The tradeoff is a step-up to the full payment in year three, so plan for that increase within your household budget.
Investment strategies and break-even math
Break-even analysis compares upfront cost to monthly savings. For permanent buydowns, break-even months ≈ upfront points paid ÷ monthly payment reduction. If 2 points ($8,000 on a $400,000 loan) reduce the rate from 7.0% to 6.5%, the payment drops about $133 per month, implying a payoff around 60 months. For 2-1 buydowns, the cost generally equals the sum of year-one and year-two payment subsidies. Using the numbers above, total subsidy is about $9,324, or roughly 2.3% of the loan amount. If you expect to sell or refinance within two to three years, the temporary approach can deliver more near-term cash flow per dollar spent; if you expect to hold the loan longer, permanent points can make more sense over time. Consider opportunity cost as well: funds used for points could be kept in savings or investments, so compare after-tax, after-fee returns.
Insurance options and mortgage costs
The rate path you choose may interact with mortgage insurance and risk protection decisions. With less than 20% down on conventional loans, private mortgage insurance (PMI) adds to monthly costs until sufficient equity is reached; a lower permanent rate can accelerate principal amortization, helping reach removable PMI sooner. Temporary buydowns reduce the payment but not the note rate, so PMI cancellation timing is unaffected by the temporary discount. Homeowners insurance and property taxes also influence escrowed payments; ensure your budget accommodates these alongside any payment step-up in year three.
Real-world pricing and providers vary by market conditions, lender policy, and loan profile. The estimates below are for illustration only and based on a $400,000 conventional loan scenario in the U.S. Always confirm current offers, eligibility, and terms directly with lenders, and understand that costs can change.
| Product/Service | Provider | Cost Estimation |
|---|---|---|
| 2-1 Temporary Buydown | Rocket Mortgage | Typically 2.0%–2.6% of loan amount; about $8,000–$10,400 on $400,000, reflecting the year-one and year-two payment subsidy. |
| 2-1 Temporary Buydown | Chase Home Lending | Similar structure; often funded by seller or lender credit when available; borrower-paid cost in the ~2.0%–2.6% range. |
| 2-1 Temporary Buydown | Fairway Independent Mortgage | Commonly offered on conventional and some government loans; cost equals expected payment subsidy for first two years. |
| Permanent Rate Buydown (Points) | Better Mortgage | About 1 point = 1% of loan amount; typical rate reduction ~0.25%–0.375% per point, subject to market. |
| Permanent Rate Buydown (Points) | Wells Fargo | Points priced daily; example 1–2 points ($4,000–$8,000 on $400,000) with savings depending on rate sheet and credit profile. |
Prices, rates, or cost estimates mentioned in this article are based on the latest available information but may change over time. Independent research is advised before making financial decisions.
Wealth management perspective
Liquidity, risk tolerance, and diversification shape the choice. A 2-1 buydown preserves more upfront cash if a seller or lender funds it, or if you prefer to keep savings available for emergencies and market opportunities. Paying points concentrates capital into the mortgage to reduce long-term interest expense, akin to a conservative fixed-income allocation. Alternatives, such as making targeted principal prepayments instead of buying points, can also improve lifetime interest costs while retaining flexibility to stop prepaying if circumstances change. Align the approach with your liquidity needs and the probability of refinancing.
Conclusion Both options can be useful when matched to time horizon and cash-flow priorities. Temporary buydowns deliver near-term payment relief but require preparation for a higher payment later, while permanent points trade upfront dollars for ongoing savings that become more compelling the longer the loan is held. Clear break-even math, realistic refinancing assumptions, and an honest look at liquidity can guide a balanced decision in your area.