If you get a bunch of seller credits to apply toward your closing costs, you may be faced with the question of doing a buydown.

"Do you want a temporary buydown or a permanent buydown?" -asks the loan officer

"Temporary sounds fleeting" -you

"You're going to refinance before the 2 year temporary buydown is up anyway"

"you sure about that?"

"60% of the time, I'm right every time"

"That doesn't make sense"

I'm writing this so you know the differences between the two buydown options. I'm going to borrow some material that I've posted before.

Here's what I'll cover:

1. How permanent buydowns work
2. How temporary buydowns work
3. A chart showing differences side by side

Permanent buydowns

Here's how it works.

When you pay money toward a permanent buydown, once it's paid it's gone.

Permanent buydowns are an exchange of added upfront closing costs for a lower interest rate.

The benefit you get is a lower rate fixed for 30 years. The benefit the lender/investor gets is a big chunk of money upfront from you.

Here's an example of a loan I'm pricing out today (20% down, 759 credit, $384,000 loan amount) to give you an idea of the idea of buying down an interest rate.

This is a rate stack, or a rate chart for today:

Rate	Buydown cost
5.75%	$7,258
5.875%	$4,613
6%	$2,018
6.125%	$76
6.25%	(credit) $990
6.375%	(credit) $2,973

On this chart, the closes to par ($0) is 6.125%

If you wanted to get a 5.75% interest rate, you'd have to spend an additional $7,258 in closing costs to obtain that rate.

If the seller is paying a huge amount toward your closing costs, then this is one way you can spend it.

Side note: As you can see, if you go above par, then the lender will pay you an upfront chunk of money in exchange for you taking on a higher rate.

It's pretty straightforward. You pay, you get it fixed for 30.

Temporary buydowns

Let's jump into temporary buydowns now.

Here's how it works.

Pretend your seller gives $10,000.00 for a 2/1 buydown.

That money is set aside, pretend it's in a piggy bank.

Let's also say your permanent mortgage payment is $2,000 per month.

What the 2/1 buydown does is it takes money from that piggy bank to help you get a lower payment for the first 2 years.

Year 1, the piggy bank gives $500 per month. So you're paying $1,500.

Once the first year is up, the piggy bank has paid $6,000 and has a remaining balance of $4,000

Year 2, the piggy bank gives $333.33 per month. So you're paying $1,666.67 per month.

By the end of year 2, the piggy bank is empty.

Once year 3 starts, you'll be paying $2,000 per month.

Here's how temporary buydowns do NOT work

You cannot pay for it yourself. It must come from the seller.

This does not make your interest rate 2% lower the first year. I want to clear that up. Otherwise your payment would have a lot more going to principal.

It isn't helping the total interest charged.

It helps make the monthly payment as if it were 2% lower. But the fact that the piggy bank has to supplement, means that the interest you pay is the exact same.

Here's what happens if you don't use the temporary buydown

This is the best part about it.

Let's say you refinance or sell after 1 year.

That remaining $4k in the piggybank? That gets applied straight toward your principal balance.

Are there other temporary buydowns?

Yes. Say you have a 1/0 buydown. Let's say it costs $4k.

It just lowers your payment $333.33 for the first year. Then you're back to normal payments.

There's a 3/2/1 buydown, a 1/1 buydown and they work similarly.

The chart to compare

Feature	Temporary Buydown	Permanent Buydown
Who Can Pay for It	Must be paid by the seller (lender rules)	Can be paid by buyer or seller
How It Works	Seller funds placed in escrow (“piggy bank”) to subsidize monthly payments for a set time (2/1 = 2 years lower payments)	One-time upfront cost paid at closing to permanently lower the interest rate
Effect on Interest Rate	Actual rate stays the same; payment is reduced temporarily through subsidies	Interest rate is reduced for the entire life of the loan
Common Structures	3/2/1, 2/1, 1/0, 1/1	Depending on the lender's rate stack for the time
Upfront Cost	Equal to total payment reductions over buydown period (funded by seller)	Varies based on desired rate drop and lender pricing
Monthly Payment Impact	Reduced for a limited time, then steps up to full payment	Reduced for the entire loan term
Impact on Total Interest Paid	No reduction in total interest, only a payment subsidy	Reduces total interest paid over life of loan
Refund if Loan Ends Early	Any unused “piggy bank” funds are applied to principal if you sell/refinance early	No refund. Cost is fully spent at closing
Best For	Buyers expecting income growth or short-term lower payments before refinancing/moving	Buyers planning to keep the loan long-term and benefit from lower interest costs

That's it. Hope this helped!

Sam