How a mortgage rate buydown can offset today’s higher interest rates

This week, Freddie Mac reported the 30-year fixed rate mortgage rose to 6.69%, the highest since July 2025. Compare that with Freddie’s lowest rate of the year at 5.98% on Feb. 26.

On a loan amount of $800,000, today’s Freddie payment is $371 more than the February payment (6.69% is $5,157 and 5.98% is $4,786) and certainly less affordable.

Payment affordability is always a top priority for buyers. One way to get around today’s higher interest rates is through an interest rate buydown. A buydown allows an interested party contribution or IPC (buyer, home seller, or realty agent) to pay points in the form of an upfront fee in order to lower the mortgage interest rate.

There are two types of interest rate buydowns. One is a permanent buydown and the other a temporary buydown, typically on fixed rate mortgages. There also is a dearth of adjustable-rate mortgages offering buydowns.

A permanent buydown gives the borrower a lower fixed mortgage rate for the life of the loan.

For example, let’s say the interest rate on your 30-year mortgage of $800,000 is 6.25% and 1 point loan origination cost (each point is 1% of the loan amount or $8,000 in this example). The monthly principal and interest payment is $4,926. Now, let’s say the home seller kicked in 2 points ($16,000) to get the rate all the way down to 5.75%, one-half percent lower. The payment drops to $4,669, a difference of $257 per month.

Does that make enough of a payment affordability difference? For some it would, especially when the permanent rate is under 6%.

As the name suggests, a temporary buydown gives the borrower a lower fixed rate temporarily.

For example, if the rate was bought down for one year, that means the rate is 5.25% for the first year and then 6.25% for the remaining 29 years. Industry jargon calls this a 1:0 buydown.

Buying the rate down for two years or a 2:1 buydown means the first-year interest rate would be 4.25% and the second-year interest rate would be 5.25%. The remaining 28 years would be at 6.25%. The lowest you can go is a 3:2:1 buydown (3.25%, 4.25%, 5.25% and 6.25% for the remaining 26 years). The temporary buydown may also be funded by any of the interested parties.

There is a big difference in the way the temporary buydown and permanent rate buydown points/fees are calculated.

In respect to a permanent buydown, more or less, for each 1 point paid, the borrower gets a one-quarter percent lower interest rate. Using the example above (6.25% bought down to 5.75%) the rate was bought down with 2 points cost or $16,000.

If you take $16,000 divided by $257 (monthly payment spread between 5.75% and 6.25%) it takes you more than 62 months to break even. If you think you will be selling the property or refinancing within the first five years, it might not be the best use of your concession money as you get no refund in respect to the unused permanent buy-down points that were paid.

It’s a different story for a temporary buydown. The funds are put into a refundable escrow account (should you sell or refinance that loan with remaining time left on the buy-down period). Each month, money is taken from the escrow account to cover the difference between the bought-down rate and the permanent note rate.

Let’s say you were doing a 2:1 buydown on that $800,000 loan amount. The principal and interest payment at 4.25% is $3,936. The principal and interest on 6.25% is $4,926. The monthly payment difference between the two is $990. Multiply $990 by 12 months which comes to $11,880.

Now, in the second 12 months you have a 5.25% interest rate with a monthly payment of $4,418. The monthly payment difference between the 5.25% rate and the 6.25% interest rate is $508. Multiply $508 by 12 months which totals $6,096. Now add the total of the two years of buydown costs ($11,880 plus $6,096) which comes to a temporary buydown cost of $17,976 or a little more than 2.2 points.

In this example, a temporary buydown costs almost $2,000 more than the permanent buydown. But a borrower would have refundable escrow funds should they refinance or sell in a short period of time.

The permanent buydown is best if you are staying in the property for a long period of time and don’t think rates will come down (enough to make sense of refinance) or you won’t be able to qualify in the future (job retirement, for example).

Regarding a Fannie Mae conventional mortgage, if you are putting less than 10% down, the interested party contribution is limited to 3% of the sales price, if you are putting at least 10% up to 24.99% down payment, the IPC is 6%, and if you are putting at least 25% down, the maximum IPC is 9%.

Federal Housing Administration or FHA allows up to 6% for IPCs.

Let’s say your income isn’t enough to qualify for a regular fixed rate. Buying down the rate, regardless of who pays for it, might get you there. For loan qualifying purposes, the permanent buydown uses the bought-down mortgage rate. The temporary buydown qualifies you at the final note rate, not any of the temporary interest rates.

Real estate professionals I’ve recently chatted with do not expect a pickup in home sales in the second half of the year.

“Buyer demand is down slightly compared to 2025 due to mortgage rates climbing to the highest levels in years,” said Steven Thomas, chief economist at Reports on Housing. “Last year, rates were falling weekly, which boosted demand to close out 2025. Expect the rest of 2026 to be sluggish with mortgage rates stuck at these higher levels.”

The point is there may be some very motivated sellers who need to move their properties. It might be good timing for your real estate agent to ask for buydown concessions.

What about home builders? Look no further than your local home builder’s tracts.

To my knowledge, builders are paying holding costs on plenty of completed, standing inventory of homes. I’ve heard of some super aggressive buydown loan programs being offered. For example: 1.99% start rate on a 2:1 adjustable-rate buydown (the note rate adjusts after seven years). Year two is 2.99%. Years three through seven are 3.99%.

Keep in mind, builders do not want to lower their prices because it will just kill their comparable sales in respect to appraisers trying to come up with final values for other buyers. So, the builders are highly motivated to provide lots of concessions.

Freddie Mac rate news

The 30-year fixed rate averaged 6.69%, 3 basis points higher than last week. The 15-year fixed rate averaged 6.01%, 3 basis points lower than last week.

The Mortgage Bankers Association reported a 2.9% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $33 less than this week’s payment of $5,368.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875 %, a 15-year conventional at 5.75%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 5.99% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.625% and a jumbo 30-year-fixed at 6.25%.

Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.5% for the first five years payments, and 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.