A permanent mortgage buydown uses upfront discount points to obtain a lower note rate for the loan term, subject to the lender's pricing and loan terms.
A permanent mortgage buydown uses upfront funds, usually paid as discount points at closing, to obtain a lower contractual interest rate than the lender would otherwise offer for the same loan. Unlike a temporary buydown, the lower rate is written into the note and applies for the loan term unless the mortgage is paid off, refinanced, or modified.
The word “permanent” distinguishes the pricing choice from a short payment subsidy. It does not mean the borrower must keep the mortgage forever or that the quoted rate reduction is guaranteed to produce savings.
Mortgage lenders typically offer a range of rate-and-cost combinations. One option may have fewer upfront points and a higher rate. Another may require more points and provide a lower rate. The borrower chooses among the available combinations before closing, and the selected note rate determines scheduled interest and principal-and-interest payments.
A discount point is calculated as:
For a $400,000 mortgage, one point costs:
The rate reduction purchased by that point depends on market conditions, loan type, term, occupancy, credit profile, lock period, and lender pricing. It should be taken from an actual quote or Loan Estimate, not assumed from a rule of thumb.
Assume a borrower compares two 30-year fixed-rate offers on a $400,000 mortgage:
| Choice | Note rate | Points paid | Monthly principal and interest |
|---|---|---|---|
| No-point illustration | 6.50% | $0 | $2,528.27 |
| Permanent buydown illustration | 6.25% | $4,000 | $2,462.87 |
The lower-rate option reduces scheduled principal and interest by about $65.40 per month. A simple break-even estimate is:
Under this simplified comparison, the points are recovered after roughly 62 monthly payments. The example excludes differences in other fees, tax treatment, opportunity cost, mortgage insurance, and the time value of money. Actual quotes may also require more or less than one point for a 0.25 percentage-point rate difference.
| Feature | Permanent buydown | Temporary buydown |
|---|---|---|
| Note rate | Lower contractual rate | Usually unchanged |
| Payment effect | Lower scheduled principal and interest for the term | Lower borrower-funded amount during a defined opening period |
| Funding | Discount points paid at closing | Funds deposited for scheduled payment subsidies |
| Qualification | Based on applicable underwriting terms | Agency programs generally require qualification at the note rate |
| Main risk | Paying upfront and exiting before break-even | Payment increase when subsidy ends and full-payment obligation |
The documents matter more than the marketing label. A borrower should identify the note rate, points, credits, temporary subsidy agreement, and payment schedule separately.
Compare offers for the same property, loan amount, term, loan type, occupancy, down payment, lock period, and date. A rate from one scenario cannot be compared reliably with points from another.
Break-even analysis depends on how long the mortgage remains outstanding. Consider a possible sale, refinance, relocation, prepayment, or other event that could end the loan before the points are recovered.
Paying points uses cash that could otherwise support the down payment, closing costs, repairs, or emergency reserves. A lower payment is not necessarily valuable if the upfront charge weakens liquidity.
The annual percentage rate can help compare financing costs, but it relies on assumptions and is not a substitute for reviewing the Loan Estimate. Check the points, lender credits, origination charges, cash to close, projected payments, and five-year comparison.
The borrower, seller, builder, lender, or another permitted party may fund points, subject to loan-program and contribution limits. A seller-funded buydown is not free in an economic sense if it affects the negotiated home price or replaces another concession.
Discount Points generally exchange more upfront cost for a lower rate. Lender credits generally exchange a higher rate for help with eligible closing costs. Neither direction is automatically superior. The better fit depends on the borrower’s cash constraints, expected holding period, and actual pricing.
Mortgage pricing and program rules vary by lender, loan type, jurisdiction, and date. This material is educational and is not individualized mortgage, legal, tax, or financial advice.