Editorial Disclosure: David Rodriguez, NMLS #1847392, has structured over 300 buydown transactions in his 12-year career. All calculations use February 2026 market rates. We may earn a commission from partner links — this never influences our analysis.
In a 6%+ rate environment, buydowns are the hottest negotiation tool in real estate. But there's a critical choice most buyers don't understand: should you get a temporary 3-2-1 buydown (lower payments for 3 years) or use the same money for a permanent rate buydown with discount points (lower rate forever)?
I've structured both types hundreds of times, and the answer depends on one question: how long will you keep this loan? Let me show you exactly why.
How Each Buydown Works
Temporary 3-2-1 Buydown
Your rate is reduced for the first 3 years, then reverts to the full note rate. The cost is paid upfront (usually by the seller).
Permanent Discount Points
You pay upfront "points" (prepaid interest) to permanently reduce your rate for the entire 30-year term. The savings never expire.
The Math: $400K Loan at 6.25% Note Rate
Let's say you have $16,000 in seller concessions to use. Here's how each option plays out:
Option A: 3-2-1 Temporary Buydown ($16,000 cost)
| Year | Rate | Monthly P&I | Annual Savings |
|---|---|---|---|
| Year 1 | 3.25% | $1,741 | $7,224 |
| Year 2 | 4.25% | $1,968 | $4,500 |
| Year 3 | 5.25% | $2,209 | $1,608 |
| Year 4-30 | 6.25% | $2,463 | $0 |
| Total 3-Year Savings | $13,332 | ||
Option B: Permanent Buydown — 2 Points ($8,000) → 5.75% Rate
| Period | Rate | Monthly P&I | Monthly Savings |
|---|---|---|---|
| All 30 Years | 5.75% | $2,334 | $129/mo |
| 3-Year Savings | $4,644 | ||
| 10-Year Savings | $15,480 | ||
| 30-Year Savings | $46,440 | ||
Break-Even Analysis
- Years 1-3: 3-2-1 buydown saves more ($13,332 vs. $4,644)
- Year 5: Permanent buydown catches up ($7,740 vs. $13,332)
- Year 7: Break-even point — permanent buydown overtakes
- Year 10: Permanent buydown ahead by $2,148
- Year 30: Permanent buydown saves $33,108 more
The Critical Question: How Long Will You Keep This Loan?
The average American sells or refinances every 5-7 years. If rates drop significantly in the next 2-3 years (which many economists predict), you'll likely refinance — making the 3-2-1 buydown the smarter choice because you captured the biggest savings upfront.
But if you're buying your "forever home" and rates stay elevated, the permanent buydown saves you $33,000+ more over the full term. To explore which buydown strategy works for your situation, compare lender offers that include buydown options.
Find lenders offering buydown programs
Not all lenders offer 3-2-1 buydowns. Compare options from lenders who specialize in rate buydown strategies.
Compare Buydown Lenders →When to Use Each Strategy
Choose 3-2-1 Buydown When:
- 1. You expect to refinance within 3-5 years (rates may drop)
- 2. You need lower payments now (income expected to grow)
- 3. The seller or builder is paying for it (free money)
- 4. You're stretching to qualify (lower year-1 payment helps DTI)
- 5. You're a first-time buyer who needs cash flow relief
Choose Permanent Points When:
- 1. This is your forever home (staying 10+ years)
- 2. You believe rates will stay high (no refinance opportunity)
- 3. You want the tax deduction (points are deductible in year 1)
- 4. You have cash to pay for points yourself
- 5. You want the lowest possible long-term cost
Real Scenario: New Construction with Builder Incentive
My clients Tom and Lisa were buying a $450K new construction home. The builder offered $18,000 in incentives (4% of purchase price). They had two options:
Option A: 3-2-1 Buydown
- Cost: $16,200 (from builder)
- Year 1 payment: $1,958 (3.25%)
- Year 2 payment: $2,214 (4.25%)
- Year 3 payment: $2,485 (5.25%)
- Year 4+: $2,771 (6.25%)
- 3-year savings: $15,012
Option B: 2.5 Points Permanent
- Cost: $11,250 (from builder)
- All years: $2,625 (5.625%)
- Monthly savings: $146
- Remaining $6,750: closing costs
- 3-year savings: $5,256
Tom and Lisa chose the 3-2-1 buydown. Their reasoning: they planned to refinance if rates dropped below 5.5% (widely expected by 2027-2028). The $15,012 in first-3-year savings was nearly 3x the permanent option's savings over the same period. If they refinance in year 3, they'll have saved $15K and locked in a lower permanent rate.
Smart move? I think so. But if rates don't drop, they'll wish they'd gone permanent. That's the gamble. To get pre-approved and explore buydown options, start with a rate comparison.
Pro Tips from 300+ Buydown Transactions
1. Always negotiate the seller to pay
In 2026's market, 68% of sellers are offering concessions. Ask for a buydown instead of a price reduction — it saves you more money because it reduces your interest cost, not just the principal.
2. The "hybrid" strategy
Use part of the concession for a 2-1 buydown AND part for 1 permanent point. This gives you short-term relief AND a permanently lower rate. I call this the "best of both worlds" approach.
3. Unused buydown funds are refundable
If you refinance during the buydown period, the unused portion of the 3-2-1 buydown escrow is typically applied to your loan balance. You don't lose the money — it reduces your principal.
4. Points are tax-deductible
Permanent discount points paid on a purchase mortgage are fully deductible in the year paid (IRS Publication 936). On a $400K loan, 2 points = $8,000 deduction. At a 24% tax bracket, that's $1,920 back. 3-2-1 buydown costs are NOT deductible.
Frequently Asked Questions
What is a 3-2-1 buydown?
A temporary rate reduction: 3% below note rate in year 1, 2% below in year 2, 1% below in year 3. Full rate from year 4 onward. The cost is paid upfront, typically by the seller or builder.
What is a permanent rate buydown with discount points?
Prepaid interest that permanently reduces your rate. 1 point = 1% of loan amount = approximately 0.25% rate reduction for all 30 years.
Which buydown saves more money?
3-2-1 saves more in years 1-3. Permanent points save more after year 7. Break-even is typically 5-7 years. Choose based on how long you'll keep the loan.
Can the seller pay for a 3-2-1 buydown?
Yes — sellers can contribute 3-6% of the purchase price as concessions. A 3-2-1 buydown on a $400K loan costs $14K-$18K, which fits within most concession limits.
Explore Buydown Options for Your Purchase
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