Rate Buydown
Paying extra money up front — usually in discount points — to lower the loan's interest rate, either for the full term (permanent buydown) or for the first few years (temporary buydown).
A rate buydown is paying cash at closing to reduce your interest rate. On investor loans this is almost always a permanent buydown done with points: you pay a fee equal to a percentage of the loan amount and the lender lowers your note rate for the life of the loan.
Permanent vs. temporary
- Permanent buydown — points paid at closing cut the rate for the entire term. Most common on DSCR loans and rental refinances.
- Temporary buydown (e.g., a 2-1 buydown) — the rate is reduced for the first year or two, then steps up to the note rate. More common in seller-paid or owner-occupied deals; occasionally offered on investor loans to boost early cash flow.
How the math works
Each point is 1% of the loan amount. A typical rule of thumb is that one point buys down the rate by roughly 0.25%, though the exact relationship varies by lender and market.
Loan amount: $300,000
Buy down rate by 0.50% → ~2 points
Cost at closing: 2% × 300,000 = $6,000
Monthly P&I savings (example): ~$100/month
Breakeven: $6,000 ÷ $100 ≈ 60 months (5 years)
A worked example for a DSCR deal
An investor's rental shows a DSCR of 0.98 at the quoted 8.0% rate — just under the 1.0 threshold the lender needs. By buying the rate down to 7.5% for 2 points ($6,000), the monthly payment drops, PITIA falls, and the DSCR rises above 1.0. The buydown didn't just save interest — it made the loan qualify.
How it's used in investor lending
Buydowns are a lever for two goals: lowering long-run interest cost and engineering a qualifying DSCR. The decision hinges on your hold period — if you'll sell or refinance before the breakeven point, the up-front points are wasted. Buydowns also interact with seasoning and prepayment penalty terms, so model the full cost. The opposite move — taking a higher rate in exchange for the lender paying your costs — is a lender credit.
This is general information, not financial advice; run your own breakeven before paying points.
Frequently asked questions
Is buying down the rate worth it on an investor loan?
It depends on your hold period. Calculate the breakeven: divide the up-front cost by your monthly savings to get the number of months to recover it. If you'll hold past breakeven, the buydown pays off; if you plan to sell or refinance sooner, you'd likely keep more cash by taking the higher rate. On DSCR loans, a buydown can also be worth it simply to push the ratio above the lender's threshold.
How much does one point lower my rate?
A common rule of thumb is about 0.25% per point, but it varies by lender, loan program, and market conditions. Always ask for the specific rate-and-points grid so you can compare a few buydown levels side by side.
What's a temporary buydown like a 2-1 buydown?
A temporary buydown lowers the rate for the first year or two and then steps up to the full note rate. A 2-1 buydown cuts the rate by 2% in year one and 1% in year two. These are more common on owner-occupied or seller-paid deals, but can occasionally be used on investor loans to improve early cash flow.