The Real Deal on Mortgage Buydowns: Pros, Cons, and More

May 19, 20238 min read
The Real Deal on Mortgage Buydowns: Pros, Cons, and More
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • A mortgage buydown is when someone buying a home or refinancing their mortgage pays for interest points upfront, which can slash their monthly payment and reduce their interest rate.
  • Depending on the mortgage buydown type, the rate decrease could be permanent or temporary.
  • Generally, a mortgage buydown works best for those who buy a home they expect to own for more than a couple of years, and whose income will increase in the years to come.

It is important for real estate investors and those who wish to enter the market to understand mortgage buydowns, including their benefits and considerations, and how they compare with traditional mortgages. 

Here is the mortgage buydown: what it is and how it works. 

What is a Mortgage Buydown?

A mortgage buydown is a financing technique in which a homebuyer pays for interest points upfront in exchange for a lower loan interest rate.

A buydown is usually offered by the builder or seller to help heighten opportunities to sell the property by rendering it more affordable.

There is technically no cap on how many points can be bought on a mortgage. However, the number of points an individual can purchase can hinge on the mortgage type and loan terms. How much each discount, or point, costs depends on the loan amount. In some instances, a buyer may opt to buy enough discount points to lower their interest rate over the loan’s life. By garnering a buydown loan, the home buyer pays an even bigger amount up front that impedes their rate, and therefore their monthly mortgage payments, from ever rising.

While most buydowns are negotiated between lenders and buyers, sellers may also provide a buydown to incentivize the individual to buy the property. In addition, builders may also offer a buydown. Usually, a builder will make upfront payments to get early buyers to secure properties in their newly constructed communities. Such builders are generally less inclined to offer such an incentive once the community is up and running.

How Does a Mortgage Buydown Work?

To reduce their rate and monthly payment, someone buying a home or refinancing their mortgage can purchase discount points at closing to prepay mortgage interest. The property’s seller or builder typically makes payments to the mortgage lender, which lowers the rate, and thus the monthly payment.

Every discount point costs 1% of their loan amount. Buying one point on a $350,000 loan would cost $3,500 upfront, for example. However, the amount by which the rate is lowered per point depends on the lender, and the rate reduction is not necessarily 1:1. Purchasing one point could drop one’s interest rate, for example, by 0.50% or 0.375% instead of the full 1%. 

It is generally a good idea to check out multiple lenders to compare rates and buydown options. 

Benefits and Considerations of a Mortgage Buydown

There are advantages and considerations that one should consider when mulling a mortgage buydown, including:

  • Lower initial payments. A reduced interest rate can slash the homeowner’s monthly payment, freeing up money for other investments, long-term expenses, or financial objectives. The type of buydown chosen will determine whether the lowered costs are temporary or permanent.
  • Financial planning. Another benefit to mortgage buydowns is that they can help with long-term financial planning. The homeowner knows what their rate will be. 
  • Additional costs. Mortgage buydown considerations include the fact that there will be additional expenses, as well as long-term costs. Once the buydown ends and the rate goes back up, it can be challenging to keep up with payments without an income increase.
  • Long-term costs. Depending on the mortgage buydown’s structure, not only may the lower interest rate be temporary, but the increased mortgage payment at the low-rate period’s end could put a strain on the homeowner’s budget. 

Mortgage Buydown vs. Traditional Mortgage

Overall, traditional mortgages have more stability, while mortgage buydown allows for a lower interest rate, which can be beneficial for someone with a specific financial situation. 

Mortgage buydowns began surging last fall amid increased interest rates and a cooling housing market, which caused an increased number of home sellers to lure buyers by paying for a temporary drop in the buyer’s mortgage interest rate. As rates rose to 7 percent, the buydown helped to mitigate some of the sticker shock buyers were experiencing. 

So, while rate buydowns have been around for years, they generally come into play under those market conditions. In fact, some of the nation’s biggest lenders, including Guaranteed Rate, United Wholesale Mortgage, and Rocket Mortgage began marketing the technique last year, with Rocket Mortgage calling its mortgage buydown program an “Inflation Buster.”

Is a Mortgage Buydown Popular?

Overall, traditional mortgages remain more popular than mortgage buydowns. However, whether a mortgage buydown is suitable for an individual depends on the homeowner’s financial situation.  Whomever is interested in buying down their mortgage should first calculate their breakeven point to see whether it is worth the upfront investment.

What are Some Types of Mortgage Buydowns?

Depending on the mortgage buydown type, the rate decrease could be permanent or temporary.  

With a permanent rate reduction, the interest rate discount covers the life of one’s loan, providing the homeowner with a reduced monthly payment during the whole amortization schedule.

With what is called a 3-2-1 buydown, the interest rate reduction is temporary – it begins low and rises incrementally for the first three years. The rate is 3% lower the first year, 2% lower the second year, and 1% lower the third.

Beginning with the fourth year and continuing throughout the life of the loan, the rate increases to the standard rate. If a loan’s standard rate is 7%, for example, the rate would be 4% the first year, 5% the second, 6% the third, and 7% in each ensuing year.

Here, the money paid up front is placed into an escrow account, to which the seller contributes. Every month, a sum equal to one’s rate drop is withdrawn from that account and put toward one’s payments. Ultimately, the homeowner will still pay the same for the mortgage as they would sans the buydown.

There is also a 2-1 buydown in which the interest rate is cut by 2% in the first year, and 1% in the second. Subsequently, the rate goes up in the third year and remains the same for the balance of the loan term.

As with a 3-2-1 buydown, funds obtained at closing will be placed into an account from which money is deducted monthly. In the end, the homeowner will pay the entire amount for the mortgage, just as they would if they had not made upfront payments.

Invest in Real Estate

Unlock the potential of private real estate markets.

Should You Take a Mortgage Buydown?

Whether it makes sense to go with a mortgage buydown when purchasing a home can hinge on the rate for which the buyer qualifies. Generally, a mortgage buydown works best for those who buy a home they expect to own for a long time and whose income is expected to increase in the years to come. The reason is because the longer a home is owned, the more likely it will be that the homeowner, after buying discount points, will experience the full benefit of interest savings.

If the house is sold too soon, the homeowner will not reach the point where money saved due to the reduced rate begins to exceed the cost of purchasing points upfront.

For example, if a new home is bought with a $400,000 loan, purchasing a single point for $4,000 permanently decreases the homeowner’s rate from $2,903 to $2,771. Here, it would take about two-and-a-half years for the $132 in monthly savings to reach the $4,000 paid for the point. If the homeowner intends to remain in the house for over two years, interest savings will continue to pile up.

A buydown could also work for those who wish to get a mortgage without markedly raising the home’s purchase price or draining their bank account.

Conversely, taking a mortgage buydown may not be the best move if, before the two-year mark, the homeowner must relocate before recovering the cost, or if their wages will likely be stagnant, or even decrease, in the future.

To determine whether a buydown is appropriate, the breakeven point must be calculated. The breakeven point is how much time it will take to recoup the discount points’ cost. The calculation calls for dividing the cost of the discount points by the monthly savings.

Note that there are ways to invest in real estate in which a mortgage buydown is unnecessary. Leading alternative investment platform Yieldstreet, for example, offers a Growth & Income real estate investment trust that aims to make debt and equity payments in a mix of commercial real estate in key U.S. markets.

Along with asset classes such as art and transportation, real estate is a type of alternative investment. Besides the potential for regular monthly income, investments in real estate can help diversify portfolios, which, in turn, can mitigate overall risk and volatility.

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


Depending on their financial situations, real estate investors and homebuyers seeking a respite from lofty interest rates have as an option a mortgage buydown, which would serve to lower the rate and monthly payment.

However, a buydown is not a good fit for everyone, and there are ways to invest in real estate in which the process is unnecessary.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure