Rate buydowns: discount points and temporary buydowns

A buydown is money paid up front to lower the interest rate. A permanent buydown (discount points) lowers the note rate for the life of the loan. A temporary buydown lowers the payment for the first year or few years, then the full note payment applies.

This is general education, not financial or tax advice. Whether points are worth it depends on your own loan offers and how long you keep the loan. This site doesn’t supply rates.

On this page: Discount points · Where points appear · Taxes · Temporary buydowns · Who can pay, and limits · Rate used for underwriting · Break-even

Permanent buydowns: discount points

Where points appear on the Loan Estimate and Closing Disclosure

Points paid to the lender to reduce the rate are itemized separately in Section A, Origination Charges, as both a percent of the loan amount and a dollar amount, labeled “___% of Loan Amount (Points).” If no points are paid, that line is blank.Source: 12 CFR 1026.37(f)(1)(i) (Regulation Z: points itemized under Origination Charges on the Loan Estimate) · checked Nov 10, 2026 They appear on page 2, Section A of both the Loan Estimate and the Closing Disclosure, and lender credits appear as a negative number in Section J.Source: CFPB: “How should I use lender credits and points (also called discount points)?” (Ask CFPB #136, last reviewed Oct 19, 2023) · checked Nov 10, 2026

Points paid to the lender are in the zero-tolerance bucket, so they can’t go up from the Loan Estimate unless a revised estimate is allowed. See tolerance buckets.Source: 12 CFR 1026.19(e)(1)(iii) and (e)(3) (Regulation Z: Loan Estimate timing and good-faith tolerances) · checked Nov 10, 2026

How the IRS treats points

Tax rules have conditions this page doesn’t cover. Confirm with IRS Publication 936 or a tax professional.

Temporary buydowns (2-1, 3-2-1, 1-0)

A temporary buydown puts money into an account at closing that covers part of each payment for the first year or years. The names describe how many percentage points the effective rate is reduced in each year: a 2-1 is 2 points below the note rate in year 1 and 1 point below in year 2; a 3-2-1 runs three years; a 1-0 runs one year. VA’s handbook names 3-2-1 and 2-1 as common frameworks.Source: VA Pamphlet 26-7, Lenders Handbook, Chapter 7, Topic 7, Loans Involving Temporary Interest Buydowns (change date Jul 27, 2023; KnowVA article updated Jul 24, 2026) · checked Nov 10, 2026 The note itself keeps the full rate: Fannie Mae requires the mortgage documents to reflect the permanent payment terms.Source: Fannie Mae Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns (08/07/2024) · checked Nov 10, 2026 Freddie Mac requires that the Note and Security Instrument not mention the buydown, that the agreement not change their terms, and that the Note rate and payments be calculated without the buydown.Source: Freddie Mac Single-Family Seller/Servicer Guide, Section 4204.3, Temporary subsidy buydown plans (effective 04/12/2026) · checked Nov 10, 2026

Published temporary buydown rules
ProgramMain rulesSource
Fannie MaeAllowed on fixed-rate loans and certain ARM plans for principal residences and second homes; not for investment properties or cash-out refinances. The rate reduction can’t exceed 3%, the buydown period can’t exceed 3 years, and the borrower’s portion of the rate can rise no more than 1% per year. A written buydown agreement is required, and the borrower must still make the full note payments if buydown funds aren’t available.Source: Fannie Mae Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns (08/07/2024) · checked Nov 10, 2026
Freddie MacTwo plan types: a Limited Buydown, where the initial rate is temporarily reduced by no more than 2 percentage points below the Note Rate, may rise no more than 1 point a year, and may last no more than 2 years from the first scheduled payment date; and an Extended Buydown, reduced by more than 2 but no more than 3 points below the Note Rate, rising no more than 1 point a year, for more than 2 but no more than 3 years. The initial rate is never more than 3 points below the Note Rate, and the plan never lasts more than 3 years after the first scheduled payment date. Not eligible: 3/6-Month ARMs; 5/6-Month ARMs on a 3-to-4-unit primary residence; cash-out refinances; no cash-out refinances with a buydown funded by a lender credit that comes from raising the interest rate; and investment-property mortgages. Home Possible and HeritageOne buydowns must also meet Sections 4501.2 and 4504.5. The plan must be fully funded at origination and held in a custodial account. The file must include an executed buydown agreement and the lender’s calculations of the total cost of the buydown, any interested party contributions, and the annual percentage increase in principal and interest during the buydown period. The agreement must apply the funds automatically each month to reduce principal and interest; if the funds aren’t available or aren’t paid, the borrower remains obligated for the full Note payments; and the borrower may not assign, transfer, or close the account, or withdraw funds, except as the agreement permits. The Note and Security Instrument must not mention the buydown, the agreement cannot change their terms, and the Note rate and payments are calculated without the buydown. If the loan goes to foreclosure, remaining funds reduce the debt; if it is paid in full, funds are distributed under the agreement; if the property is sold and the mortgage is assumed, the funds may continue reducing payments under the original agreement.Source: Freddie Mac Single-Family Seller/Servicer Guide, Section 4204.3, Temporary subsidy buydown plans (effective 04/12/2026) · checked Nov 10, 2026
FHATemporary buydowns aren’t permitted with refinance transactions or with Section 251 adjustable-rate mortgages. The lender must set up an escrow for the buydown funds.Source: HUD Handbook 4000.1, II.A.4.a.iii(A)(1)(c) and II.A.5.d.vii(B)(3) (temporary interest rate buydowns: note rate for qualifying), II.A.6.a.ix (buydown escrow), II.A.8.d.iii and II.A.8.f.vi (not permitted with refinances or Section 251 ARMs) · checked Nov 10, 2026
VAOnly with fixed-rate loans. Buydown payments must run at least 1 year and no more than 3 years, change on each anniversary of the first payment, and the payment increase each year is limited to what a one-percentage-point rate increase would cause. Funds are held in a segregated escrow and can’t revert to the party that set it up. Lenders may not fund a temporary buydown by charging an above-market rate.Source: VA Pamphlet 26-7, Lenders Handbook, Chapter 7, Topic 7, Loans Involving Temporary Interest Buydowns (change date Jul 27, 2023; KnowVA article updated Jul 24, 2026) · checked Nov 10, 2026

Who can pay, and how it counts toward seller-contribution limits

The full limits by program are on Closing costs explained, and you can compare a seller credit with them in the closing cost calculator.

Which rate lenders use for underwriting a temporary buydown

In other words, a temporary buydown lowers the early payments but doesn’t change the payment lenders use in the ratios. A permanent buydown changes the note rate itself.

Break-even: how long until points pay for themselves

A simple break-even divides the cost of the points by the monthly payment savings:

Break-even months = cost of points ÷ (monthly payment without points − monthly payment with points)

Made-up illustration

Reading the result

If points cost $3,000 and lower the principal and interest payment by $60 a month, $3,000 ÷ $60 = 50 months, a little over 4 years. Keep the loan longer than that and the lower payments have repaid the points; sell or refinance sooner and they haven’t.

The CFPB suggests asking lenders to show options with and without points over the shortest, longest, and most likely time you expect to keep the loan.Source: CFPB: “How should I use lender credits and points (also called discount points)?” (Ask CFPB #136, last reviewed Oct 19, 2023) · checked Nov 10, 2026 This simple math ignores taxes, what the cash could have earned elsewhere, and the chance you sell or refinance early. Try it with your own offers in the points break-even calculator.

Guidelines change; confirm with a licensed lender.