What Is a Permanent Buydown on a Mortgage?

A permanent buydown allows homeowners to reduce their mortgage interest rate. This involves an upfront payment to the lender, securing a lower interest rate for the entire loan duration. Borrowers can achieve long-term savings on housing expenses, impacting the overall cost of homeownership.

Understanding Mortgage Points

Mortgage points are an upfront payment to a lender that reduces the interest rate on a home loan. These points are essentially prepaid interest, allowing borrowers to secure a more favorable rate over the loan term. Each point typically costs one percent of the total mortgage amount. For example, on a $300,000 loan, one point would equate to $3,000.

Borrowers pay for these points at loan closing. This payment is separate from other closing costs. The decision to pay points is often a trade-off between a lower monthly payment and the initial cash outlay. Paying points can be a strategic financial move for those planning to stay in their home for an extended period.

Defining a Permanent Buydown

A permanent buydown involves the borrower paying mortgage points at closing to secure a reduced interest rate for the entire life of the loan. This lower interest rate remains consistent throughout the repayment period, assuming a fixed-rate mortgage. The objective is to decrease the total interest paid over many years. This differs from a temporary buydown, which only lowers the interest rate for a limited initial period, typically the first one to three years.

With a permanent buydown, the borrower makes a one-time, lump-sum payment. This payment directly influences the lender’s quoted interest rate, allowing them to offer a more attractive rate. The benefit of this approach is long-term predictability and reduced monthly mortgage expenses. It represents a direct investment in lowering the ongoing cost of borrowing.

How a Permanent Buydown Affects Your Mortgage

Paying points as part of a permanent buydown directly translates into a lower interest rate applied to the mortgage principal. This reduced rate then leads to a decrease in the borrower’s monthly mortgage payments. For instance, a $350,000 mortgage at 7% interest might have a principal and interest payment of approximately $2,329. If a permanent buydown lowers the rate to 6.5%, the payment could drop to around $2,212. Over a 30-year loan term, this difference of over $100 per month accumulates to substantial savings.

The long-term effect of a permanent buydown is a significant reduction in the total interest paid over the life of the loan. While the upfront cost of points can range from 1% to 3% of the loan amount, the savings from a lower interest rate can often outweigh this initial expense, especially if the homeowner keeps the mortgage for several years. This strategy makes monthly payments more manageable and affordable. The decision to pursue a permanent buydown depends on an individual’s financial situation and their expected tenure in the home.

Tax Implications

Mortgage points paid for a permanent buydown may be tax-deductible in certain circumstances. The Internal Revenue Service (IRS) generally treats these points as prepaid interest. For points to be deductible, several criteria must be met:
The loan must be secured by the taxpayer’s primary residence.
The payment of points must be an established business practice in the area.
The points must be computed as a percentage of the principal loan amount.
The amount paid must not be excessive.

The deduction for points is typically spread out over the life of the loan. However, in some cases, the full amount may be deductible in the year they are paid if specific criteria are met, such as being paid in connection with the purchase of a principal residence. Homeowners should consult a qualified tax professional to understand how these rules apply to their individual financial situation.