Temporary vs Permanent Buydown: The Right Way to Spend Builder Money

Temporary or permanent buydown: which should you ask the builder to fund?

Ask for a permanent buydown if you plan to keep the loan past roughly five years and want the lowest payment for the long haul. Ask for a temporary buydown (a 2-1 or 3-2-1) if you need the biggest possible payment relief in the first year or two, or if you expect to refinance before the subsidy runs out. They are two different tools, and builder money spent on the wrong one quietly evaporates.

A builder incentive is a fixed pot of money. The only question that matters is where that pot buys you the most, measured against how long you will actually hold the mortgage. This guide runs the arithmetic on a real number so the tradeoff is visible instead of abstract.

What each buydown actually does

A temporary buydown lowers your payment for a set number of years, then it ends. In a 2-1 buydown your rate is 2 percentage points lower in year one and 1 point lower in year two, then it snaps back to the full note rate in year three. A 3-2-1 buydown starts 3 points lower and steps up over three years. The party funding it (here, the builder) deposits a lump sum into an escrow account at closing, and each month that account covers the gap between what you pay and the full note payment. The CFPB and lenders are explicit on two points: a temporary buydown does not change the amount you borrow, and it does not permanently change your interest rate. Your note is written at the full rate the whole time.

A permanent buydown is different. You (or the builder, on your behalf) pay discount points at closing to lower the note rate for the life of the loan. The CFPB defines one point as one percent of the loan amount, and by law each point has to be tied to a real rate reduction. That lower rate never expires. It is the rate on your note.

So the temporary version front-loads relief and then disappears. The permanent version costs more up front and pays back slowly, forever. Which is better depends entirely on the holding period.

The worked example: an $18,000 builder incentive

Take a $400,000 loan on a 30-year fixed, with a full note rate of 6.75%. That is close to the Freddie Mac weekly average, which sat at 6.66% for the week of July 30, 2026. Principal and interest at the full rate is $2,594.39 a month. The builder has put $18,000 on the table. Here is what each choice buys.

Option A, a 2-1 temporary buydown. Year one your rate is 4.75%, so your payment is $2,086.59, which is $507.80 a month less than the full payment. Year two your rate is 5.75%, a payment of $2,334.29, which is $260.10 a month less. Year three you pay the full $2,594.39. The builder has to fund the whole gap: $507.80 times 12 is $6,093.64 in year one, plus $260.10 times 12 is $3,121.21 in year two. Total cost of the 2-1 buydown is about $9,215. That is real, front-loaded relief when moving costs and furnishing costs are highest, but it is gone after 24 months, and it used only about half the incentive.

Option B, a permanent buydown. Suppose the points move your rate a full point, from 6.75% to 5.75%. Your payment drops to $2,334.29 and stays there, a saving of $260.10 every month for as long as you hold the loan, which is $3,121.21 a year. Buying a full point down commonly runs around 4 discount points, roughly $16,000 on this loan, though pricing varies by lender and day. At $260.10 a month, $16,000 takes about 62 months, a little over five years, to break even. Hold the loan longer than that and every month after is pure savings.

Option C, take it as a price cut or closing-cost credit. Applying the full $18,000 to the price brings the loan to $382,000, and the payment at 6.75% falls to $2,477.64, a saving of $116.75 a month forever. Smaller monthly relief than either buydown, but the most flexible use of the money and the one that also shrinks your cash to close.

How to read the three numbers

Answer first: the 2-1 buydown gives the largest early relief, the permanent buydown gives the largest lifetime relief, and the price cut gives the most flexibility and the smallest cash outlay. None is universally best.

The temporary buydown only truly wins if one of two things is true. Either you genuinely need that first-year cash flow, because the payment shock of a new house is real and $507 a month is meaningful breathing room, or you expect rates to fall and plan to refinance before the subsidy expires. In that refinance case you pocketed two years of reduced payments, never faced the full rate, and any unused buydown funds are typically credited to your loan. That is the scenario builders and sellers lean on when they push temporary buydowns, and it is a real edge if the refinance actually happens.

The risk is that it might not. If rates do not cooperate and you do not refinance, your payment jumps to the full $2,594.39 in year three whether your budget grew or not. Qualify for the full payment before you accept a temporary buydown, not the teaser payment. Lenders underwrite you at the note rate anyway, but your household budget should clear the same bar.

The permanent buydown is the boring, durable choice. If you are buying a house you intend to keep, a rate that is a full point lower for 30 years is worth far more than two nice years followed by a cliff. The catch is the roughly five-year break-even: sell or refinance before then and you did not recover the points. This is the same math discount points always follow, and you can pressure-test it on the mortgage points break-even calculator with your own rate quote.

A simple decision rule

Match the tool to your holding period and your cash-flow need. If you are confident you will hold the loan more than about five years and you do not need extra first-year cash, direct builder money to a permanent buydown or a price cut. If your first-year budget is tight, or you have a specific, credible reason to expect a refinance inside two years, the temporary buydown puts the most money in your pocket right when you need it.

Do not let the headline rate decide for you. A builder advertising a 2-1 buydown is advertising your year-one payment, not your year-three payment, and year three is the one you live in longest. Ask for the number in writing at the full note rate, then compare all three uses of the incentive side by side. You can plug your own price, rate, and incentive into the Offer Buildr calculator to see the monthly figure each choice produces before you counter.

Two related pieces make this easier to weigh. If you are trying to decide whether points pay off at all, start with the break-even arithmetic on paying mortgage points, since a permanent buydown is just points bought on your behalf. And if the builder is framing this as an incentive rather than a rate tool, read whether to take concessions or a price cut, because the same dollars can often do more as a straight reduction. It also helps to have your financing locked before you negotiate any of this, which is why a real pre-approval rather than a pre-qualification gives your counter its weight.

What to confirm before you sign

Get the buydown structure in writing, including the exact rate in each year and the full note rate you land on. Confirm who funds the escrow account and what happens to unused funds if you refinance or pay off early, since those funds usually credit back to you. Confirm the points and the discounted rate they buy on your Loan Estimate, page 2, Section A, which is where the CFPB says they must appear. And run your own numbers rather than the builder's, because the incentive is a fixed pot and the best place to spend it is the one that matches how long you will keep the loan.

Estimates, not appraisals · not legal or financial advice.