The short version
A temporary buydown — the 2-1 is the common one — drops your interest rate by 2% in year one and 1% in year two, then you're at your real note rate for the remaining 28 years. Discount points are the opposite trade: you pay cash up front to lower the rate permanently, for the whole life of the loan.
The way I frame it for clients: a buydown solves a short-term cash-flow problem. Points solve a long-term cost problem. If you're stretching in the first couple of years and you expect income to grow, or you're genuinely planning to refinance when rates move, the buydown is the better tool. If you're going to hold this loan for six-plus years, points usually win outright. And here's the part people miss — the money for a buydown almost always comes from the seller, not from you.
What is a 2-1 buydown, exactly?
Somebody — usually the seller, sometimes a builder or the lender — deposits a lump sum into an escrow account at closing. That account subsidizes your monthly payment for a set period. With a 2-1, your effective rate is 2% below your note rate in year one, 1% below in year two, and your full note rate from year three on. The lender still gets paid the full payment every month. Part of it just comes out of that escrow account instead of your checking account.
Run it on a real Sonoma County number. Say you buy at $750,000, put 20% down, and your note rate comes in at 6.5% — use your own quote, rates move daily. Your principal and interest is about $3,792. Under a 2-1, year one you're paying at 4.5%, or roughly $3,040. Year two at 5.5%, about $3,407. That's roughly $9,000 of relief the first year and another $4,600 the second — call it $13,600 total, which is what the buydown costs to fund.
The rule that trips people up: you qualify at the note rate, not the buydown rate. Underwriting runs your debt-to-income at the full 6.5% payment on conventional, FHA, VA, and USDA loans. A buydown will not get you approved for a house you can't otherwise afford. It just makes the first two years easier once you're already approved.
- 2-1 buydown — 2% below note rate year one, 1% below year two, full rate after.
- 1-0 buydown — one year of relief, roughly half the cost. Underrated, and easier to get a seller to say yes to.
- 3-2-1 buydown — three years of step-downs. Available on some programs, not all.
- The funds sit in escrow. If you sell or refinance early, the unused balance is applied toward your loan — it isn't the seller's money anymore, and it isn't lost.
What are discount points, and what do they cost?
One discount point equals 1% of your loan amount, paid at closing, in exchange for a lower rate for as long as you keep the loan. On that same $600,000 loan, a point is $6,000. How much rate you get for it changes constantly with the bond market — the old rule of thumb is about a quarter percent per point, but I've seen it price better and I've seen it price worse in the same month. Get a live quote before you build a plan around it.
Take the rough version: $6,000 buys you 6.5% down to 6.25%, and your payment drops from about $3,792 to about $3,694. That's $98 a month. Divide the cost by the savings and your break-even is roughly 61 months — a hair over five years. Keep the loan past that, the points were a good buy. Sell or refinance before it, you donated $6,000 to lower a payment you didn't keep long enough to benefit from.
That break-even calculation is the whole decision, and it takes about ninety seconds to run. I do it for every client who asks about points, and probably half the time the answer is don't. Not because points are bad — because the honest answer about how long they'll keep the loan doesn't support the spend.
Which one actually saves you more money?
Over 30 years, points win — that's not close. Permanent rate reduction on a loan you hold beats two years of subsidy every time. But almost nobody keeps a 30-year loan for 30 years. In our market, people refinance, they move up, they inherit, they relocate. The average mortgage doesn't live anywhere near its full term.
So the real question isn't which saves more in theory. It's which saves more for the number of years you'll actually have this loan. Under about five years, and especially if you're buying in a higher-rate stretch that you expect to refinance out of, the buydown gives you cash relief right when it's tightest and costs you nothing long-term. Past six or seven years, points compound quietly in your favor.
There's a third answer people forget: take the cash. If a seller offers $13,000, you can put it toward a buydown, toward points, or toward closing costs and prepaids so you keep more money in the bank. I've had buyers who were better off with the cash cushion than either rate play — because a healthy reserve after closing is worth more than $98 a month when the water heater goes out in month four.
Who pays for a buydown — and can I ask the seller?
Yes, and you should. Seller-paid buydowns are the standard structure, not some exotic ask. It's a seller concession, funded out of their proceeds, and it's often an easier yes than a price cut — the seller keeps the headline sale price intact and you get the payment relief. On a listing that's been sitting in Santa Rosa or Rohnert Park for six weeks, that conversation goes better than most buyers expect.
The math sellers respond to: dropping the price $13,000 on a $750,000 home barely moves your payment — maybe $65 a month. Putting that same $13,000 into a 2-1 buydown moves it $750 a month in year one. Same dollars out of their pocket, ten times the impact on the buyer. When your agent frames it that way, it lands.
Concessions are capped by loan type and down payment, though, and the cap includes everything the seller is paying toward your side — buydown, closing costs, all of it. FHA generally allows up to 6%. Conventional caps step with your down payment. VA has its own concession rules. These are program rules that shift, so we confirm your exact ceiling before your agent writes the offer, not after.
- Seller-paid — the most common, negotiated into the purchase contract as a credit.
- Lender-paid — occasionally offered as a promotion; read what you're trading for it.
- Buyer-paid — legal on most programs but rarely smart. If it's your cash, points usually beat a temporary buydown.
- Builder-paid — common on new construction, and often more generous than what a resale seller will do.
When does a buydown backfire?
When you treat the year-one payment as your payment. I've seen this go sideways with buyers who budget to the $3,040 and then get blindsided in month 25 when it steps to $3,792. That's a $750 jump you knew about for two years and didn't plan for. If the full note payment scares you today, the buydown isn't fixing the problem — it's postponing it.
The other one is banking on a refinance that never shows up. 'We'll refi in two years' is a plan built on somebody else's interest rate decisions. If rates hold or climb, you're at the note rate on schedule with no exit. So I run it both ways with clients: here's the plan if you refinance, and here's the plan if you never do. If the second version doesn't work, we restructure the deal now.
One more, on points: if you're already tight on cash to close, spending $6,000 on a rate buy is usually the wrong move. Reserves after closing matter more to your actual financial safety than a quarter point does. Underwriting looks at reserves too.
How do I decide?
Three questions, and they're the same three I ask every client who brings this up. How long do you realistically expect to keep this loan? Is your income flat, or is it climbing over the next couple of years? And after you close, how much is left in your account?
If the answer is 'five-plus years, income is steady, cash is fine' — points, and we run the break-even to size it. If it's 'not sure how long, income should grow, things are tight the first year' — buydown, and we ask the seller to fund it. If cash after closing is thin, we skip both and put the concession toward closing costs so you land with a reserve.
None of this is guesswork. Bring me a scenario and I'll price all three side by side with your actual numbers on your actual property — buydown, points, and straight closing-cost credit — so you're comparing real payments, not hypotheticals. It's a short conversation and it's routinely worth thousands.