Permanent Discount, 2-1, 3-2-1: Seller-Funded Buydowns to Beat a 6.75% Mortgage

💡 Did You Know? You don’t always have to swallow today’s 6.75 % fixed rate. In this deep-dive of The Pulse and Perspective, host Peter D’Angelo shows how permanent discount-point buydowns and seller-funded 2-1 and 3-2-1 buydowns can shave hundreds off your payment—or front-load five-figure savings—on a $600 K purchase with 20 % down.

Inside the episode

• Permanent points decoded: 1 point drops the rate to 6.50 %, but you’ll need more than five years to break even.
• 2-1 buydown playbook: Pay like it’s 4.75 % in year 1 and 5.75 % in year 2—pocketing about $11,058 that the seller funds at closing.
• 3-2-1 turbo-boost: Start at 3.75 % and stack $21,742 in savings over the first three years.
• Concession math: With 20 % down you can tap up to $36 K (6 % of price) in seller credits—plenty to cover even an aggressive 3-2-1.
• Refi advantage: unused buydown funds slash your payoff if you refinance early.
• Watch for payment shock and tax reassessments once the subsidy wears off.

Whether you crave lower upfront payments or a long-term rate cut, Peter lays out the numbers, the risks, and negotiation tips you can take straight to the offer table.

🎧 Hit play for the full mortgage-hack roadmap, then share with anyone hunting for affordability!

#Buydown #2-1Buydown #3-2-1Buydown #SellerConcessions #DiscountPoints #MortgageTips #HomeBuying #RealEstateFinance #InterestRates #PeterDAngelo

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Peter D'Angelo | NMLS: 885309 | Branch Manager | Guaranteed Rate, Inc., NMLS 2611
Peter.DAngelo@Rate.com

*All information, topics, discussion is my own personal opinion and insight, not reflective of Guaranteed Rate, Inc. May contain market information for informational purposes only, not to be used as financial advice.

Transcript

Podcast_07.31.2025-DYK-Buydowns

 [00:00:00] 

 Welcome back to the Pulse and perspective with me, your host, Pete DiAngelo. Today is the day where we talk about buy downs, permanent buy downs, temporary buy downs, and ways that we can create affordability for ourselves because the market is not helping us with respect to what interest rates have. The good news is that they've been staying relatively the same throughout the year, and we're more than halfway through the year have not seen a huge swing on interest rates.

With that being said, I wanted to discuss some strategies that [00:01:00] you can implement when you're shopping so that you can have either the monthly savings that's your goal. Or some more long-term informed decisions on how you can create affordability for yourselves as you're shopping and as you're purchasing your next home or your first home.

I do have to have some disclaimers here for compliance purposes. This is. Used for illustrative purposes only. So the numbers and interest rates I'm going to share are going to be relatively nodding to market, but this is not an indication of what is actually available right now. The. Purpose of what I'm going to share today is to show you in an example of what could be possible, and not only could be, but very highly likely possible based on my experience of helping families and helping my clients purchase in this market, what the different buy downs would break down for, and [00:02:00] how you can generate some savings for yourself.

Also as another note, these are going to be based upon an interest rate that's close to market, but I'm kind of cherry picking it and keeping the numbers a little bit more square so that we're not dealing with anything too crazy, keeping it straightforward with the numbers that we're going to use.

We're going to take one scenario. We're going to pretend like we're buying a property for $600,000 with 20% down. And then I'm going to be generating a number of scenarios for you within that on how you can realize maybe a lower monthly payment or actually be super effective in generating savings for yourself.

Within the first five years of the mortgage. That's the timeline that we're going to use. I'm not going to be making any projections about where interest rates could go or managing when you can refinance. I'm in the state of New Jersey. Prepayment penalties [00:03:00] are illegal, so when you're buying a home, if you want to pay off that mortgage and refinance, there should not be any penalty for doing so.

So now we're going to get into it. So starting off, we need a point of reference for buying a home for $600,000 with 20% down. Our loan amount's, $480,000 with a loan amount of $480,000. The interest rate that we're going to use today as our base rate undiscounted, just, I'm getting this rate. 6.75%. That translates for us into a monthly payment of $3,113 per month, and that is principle and interest alone.

We're not gonna talk taxes or insurance. Those are property dependent, so we wanna compare apples with apples. With respect to that, we're gonna go from that base rate of 6.75. Now, what does it look like if we leverage a permanent buydown? You can pay at closing a premium that is going to discount your interest rate permanently for 30 years.

Again, [00:04:00] all of these numbers that I'm going to share are gonna be based upon a 30 year amortization. When it comes to the permanent buydown, it is a discount that you pay upfront for a lower interest rate long term. And that discount is based upon a percentage of the loan amount. We're going to look at permanent buy downs, where you're gonna use one discount point.

One discount Point is 1% of your loan amount as a cost to you at closing and two discount points. Now, that's 2%. Of the loan amount paid at closing for a permanent buydown, that means your interest rate will not change over the 30 years of your mortgage. That also means that the money that you spend on this discount is money that is spent, and if interest rates go down in the next year.

There's no recouping that money that you spent on that discount point, fringe benefit, talk to your accountant or tax professional. There's likely going to be a write off opportunity for the discount points that you do [00:05:00] pay at closing, but I defer to your accountant on that and if that is appropriate and applicable in your scenario.

So let's talk about these numbers. If you're going to pay for one discount point, normally that's going to translate into a quarter percent discount. On the interest rate, we have 6.75%. As our interest rate, quarter percent less is 6.5%.

That would be the discounted rate. Two points, 2% of your loan amount paid at closing, 6.25%. One discount point's, $4,800. The interest rate that you'll get with that is 6.5%, which means that your monthly payment's, 3030 $4 per month, that is going to wind up.

When we look at a five year, like I said, that's our time horizon. You're not going to break even. You're actually probably a little bit behind using one discount point in the five years. So for this to be lucrative and for this to generate long-term savings for you. You would need to have that mortgage for longer than five years.[00:06:00] 

Now, that one discount point, you've realized the savings, two discount points, same deal, but two discount points cost you $9,600 at closing. However, your interest rates now 6.25%, so it's a little bit lower. And your monthly payments, $2,955. Over the course of the five years, still not ahead of the game. You need to pay a couple more months on that mortgage after five years to actually start realizing and generating savings.

Why would I bring this up if this isn't providing you with long-term savings? Well. Maybe long-term savings isn't as important to you. Maybe it's more important to have a monthly payment that's comfortable. And in both of these scenarios, you can see roughly about a little less than a hundred dollars savings when you do one discount point and a little bit more than $130 savings in two discount points.

So if that is the make or break for you. [00:07:00] That could be helpful. Now, I'm also setting this up as a general rule of thumb, the way that the market is right now, some days that one discount point goes a lot further for you, so bear that in mind. It's not necessary that one discount point's a quarter percent, depends on how the market is, and also fractions of discount points.

You don't need to just pay one discount point. You may be able to pay 1.2 discount points. And then realize an even lower interest rate that may generate more savings and may reach a breakeven point within five years. So that is possible for our purposes, let's just use that. We're gonna file away the permanent discount points now.

So now we're gonna move on. To the temporary buy downs. So temporary buy downs are very interesting and they require a little bit more explanation. We just talked about a permanent buy down that comes out of your pocket as a buyer. The temporary buy downs are [00:08:00] actually part of your negotiation with the seller because the seller is the one that funds your opportunity for the temporary buydown.

How does this work? The base rate's 6.75%. In our scenario here, we're going to look first at a two one Buydown, and I think it's going to help us to go through that scenario and I'll explain through the steps so that you can have it within the context of what is possible. Two, one. Temporary buydown means that if your base rate is 6.75% when you purchase the home, you the actual monthly payment in the rate that you're going to be repaying at.

Going to be 2% discounted in year one, 1% discounted in year two. And then in year three, you're gonna be at your base rate of 6.75% and your principal and interest payment will step up year over year, over year, the difference and the monthly payment. So, you know, we're gonna use the interest rates now. 6.75 is our base rate.

So if we [00:09:00] have first year of a two one temporary buydown, your interest rate's going to be based on. 4.75%, and that's the monthly payment. In this scenario, that's going to be $2,504. That's gonna be the monthly payment you're gonna pay for the whole first year. Year two, your mortgage rate goes from 4 7 5 4 0.75% up to 5.75%, 5.75%.

As a monthly payment of $2,801. That will be the monthly payment for those 12 months for that whole 12 month period. It's not based on the calendar. It's based on when you closed in the first 12 months, second 12 months, year three, your monthly pay, your interest rate steps up, and your monthly payment steps up to the base rate of 6.75%.

The total savings. Over that time period for you is $11,058. That savings is what the seller is contributing to afford you the [00:10:00] ability to have the buy down. So the difference in the monthly payment in year one and year two when you are paying back at a lower interest rate. The monthly payment difference, it gets funded by the seller.

So you in a two, one buy down scenario, when the rubber meets road, you're going to work with your agent and you're going to say, okay, I'd like to buy this property for $600,000, but I would like them to give me a $12,000 seller concession. That means the seller's going to be giving back $12,000. When they give back $12,000, that's when you're going to be working with me and we're going to say, okay, we've got $12,000 to work with here.

This is what the cost is for a temporary buydown. And that's what your mortgage professional is going to use when they structure your financing. So your monthly payment is going to be those payments for each year until it steps up. Now we're gonna look, this isn't the only temporary buy down by the way.

Also have ability to have, [00:11:00] you know, a one one buy down or a 1 1 1 buy down. There's flexibility in how we can do these temporary buy downs to generate some momentary, or within, you know, the first couple years savings, so that your monthly payment maybe could be a little bit more manageable. I wanna look at the 3, 2, 1, buy down next.

Following the same logic, 3% lower in the first year, 2% lower in the second year, 1% lower in the third year, and then you step up taking a look at the scenario, $600,000 purchase with 20% down $480,000 loan amount. Here we go. Year one, your mortgage rate is 3.75%. Oh my gosh. Feels a lot like 2020. 

That's the payment that you'll have. That payment is $2,223 per month in year two. Your interest rate goes from 3.75 to 4.75, $2,504, year three [00:12:00] 5.75 monthly payment $2,801 year four. Now we're up to 6.75% again, and your monthly payment is $303,113. Across that whole time period, you are saving yourself $21,742 across those first three years.

That number though is what you're negotiating from the seller. As a concession to fund the temporary buy down, so they're kicking that back into the deal for you. Your mortgage professional will structure the financing accordingly, so you'll be purchasing that property for $600,000 with a, we'll just use round numbers, $22,000 seller concession, which will fund that temporary buy down for you.

Now let's talk about what that looks like in the marketplace, though. These are not created equal, these scenarios. Alright, I'm doing, I'm gonna identify the flaw here. [00:13:00] When you buy that home for $600,000, the seller's getting $600,000. When you're doing the permanent buy downs, you are funding your discount.

When you look at these temporary buy downs, the seller's netting less money. You may actually have to increase what you're purchasing the property for. That'll change the calculation here a little bit, but there's still going to be savings even if you have to pay a little bit more for that property, if it's going to generate meaningful savings for you.

As we can tell, the temporary buydown versus the permanent buydown is no comparison, how much savings there is. So if we're looking at it within that context, it may make sense to come in with a stronger offer so that you can have this concession offered to you by the seller and negotiated from the seller so that it can fund this temporary buydown.

The other thing that is a huge benefit with the temporary buydown compared to the permanent buydown temporary buy downs. If you refinance, let's say in year two, now you're [00:14:00] in year two. Let's say you've got the two one buy down scenario. So your only, your interest rate is your payment and the interest rate for payment purposes, 5.75%.

Okay? Now interest rates have reached 5.75%. You can refinance, you can lock in that that monthly payment cost permanently. So you wanna refinance, well, let's say you refinance at the beginning of year two. The amount of money that the seller contributed to facilitate the temporary buydown is accessible to you, and it actually helps you to reduce what your total loan payoff is.

That money is still available. The permanent buydown, that money is gone. Poof. You've paid it already. A temporary buydown, the money that is negotiated in the contract and negotiated in the sale that comes back to you if you're refinancing before the expiration of your temporary relief period with your interest rate.

How that works, the money that's set aside [00:15:00] goes to reduce the overall loan payoff for your mortgage. So when you're paying off that mortgage, you're not going to have to pay off as high of a loan amount. The only problem, so that's the pro side, the con side of this temporary buydown, your monthly payment's going to change, and there's something called payment shock.

That's something to be aware of. If you get used to one payment and the payment goes up, that could be painful. Not to mention if you're in a market like New Jersey and the monthly payment is stepping up, while your property's getting reassessed, and your taxes may be going up, ooh. 

So I wanna just identify a little bit more of the risk there too, but take it all into consideration. It's up to you what makes sense for you and your financial situation.

Lastly, on the temporary buy downs and permanent buydown situation, it's very important to note that. The accessibility of the temporary buy downs is going to be [00:16:00] based on your down payment percentage. Why? How does that make sense? I'll break it down for you. Interested party contributions is a particular guideline for FHA loans and conventional loans.

The two most commonly used loan programs in the marketplace, if you put the minimum down, the guidelines only permit the seller to give you a certain percentage as a concession in the scenario I outlined for us. We are doing 20% down. That gets you the maximum possible seller concession available, which that limit, I'm just gonna mention that limit.

That limit is up to 6% of the sales price, which translates to $36,000. So that means the sellers have the ability. To give you $36,000 in concession, the 3, 2, 1 buy down that came at a cost of around $22,000. We are well within the limit there. [00:17:00] If you were to put the minimum down payment, let's say you put, you're a first time home buyer buying a home with a conventional loan, you put 3% down.

3% is also your limit to the. Interested party contribution. AKA seller concession. What is that? It's $18,000. $18,000. Not enough to fund a 3, 2, 1 buy down. So that won't be possible, but it will be possible to do a two one buy down and if you are better than me and have a crystal ball and know that interest rates are gonna come down in the next year, that makes a lot of sense.

But otherwise. I wanna just use that as a way to illustrate that it's not created equal and that you do need to pay attention to other guidelines on the periphery to know if this is accessible. I hope that you found this very helpful and useful. I think that this is extremely powerful. 

We're starting here a little bit more conservative. We go to the adjustable rate mortgages. That's what it's gonna open up a little bit, and you really have to weigh your comfort [00:18:00] level with proceeding with an adjustable rate mortgage.

I look forward to giving you an update later this week. Otherwise, have a great week and take good care.