Lender-Paid Rate Buydowns

Lender-paid rate buydowns are a great opportunity for first-time home buyers.

How a Lender-Paid Rate Buydown Works

With interest rates staying higher than recent years, buyers are looking for creative ways to make homeownership more affordable. One solution gaining traction is the lender-paid rate buydown — where the lender helps lower the borrower’s interest rate for the first year or two, without requiring a seller contribution.

Here’s how it works — and what it looks like in real numbers.

What Is a Lender-Paid Buydown?

A lender-paid buydown is a type of temporary interest rate reduction, typically structured as a 1/0 or 2/1 buydown, where the lender covers the cost using lender credit (not the buyer or seller). The borrower receives a lower interest rate for the first one or two years, and then it adjusts to the full note rate for the remainder of the loan.

This strategy works because the lender offers a slightly higher note rate than the base market rate in exchange for a rebate credit, which is used to fund the buydown.

Important: While the early payments are lower, the permanent “note rate” is typically higher than the standard rate the borrower would get without a buydown.

Types of Lender-Paid Buydowns

1/0 Buydown

• Interest rate is reduced by 1% for the first year

• Full note rate begins in year 2

• Lender funds it through premium pricing (rebate credit)

2/1 Buydown

• Interest rate is reduced by 2% in year 1, and 1% in year 2

• Full note rate starts in year 3

• Offers the most initial savings, but comes with a higher note rate

Example: $400,000 Loan

Let’s compare options using a 6.50% standard rate, and higher note rates for lender-paid buydowns:

Year	Standard Loan (6.50%)	1/0 Lender-Paid Buydown (6.75%)	2/1 Lender-Paid Buydown (7.00%)
Year 1	6.50% → $2,528/mo	5.75% → $2,334/mo	5.00% → $2,147/mo
Year 2	6.50% → $2,528/mo	6.75% → $2,595/mo	6.00% → $2,398/mo
Year 3+	6.50% → $2,528/mo	6.75% → $2,595/mo	7.00% → $2,661/mo
Total Paid Over 2 Years	~$60,672	~$58,368	~$55,644
2-Year Payment Difference vs Standard	–	$2,304 saved	$5,028 saved

Monthly payments reflect principal & interest only. Actual costs may vary with taxes, insurance, and loan terms.

Why Lender-Paid Buydowns Make Sense

• No seller concession needed

• Upfront monthly savings can help with moving costs and home setup

• Can help borrowers feel more comfortable making the jump to a larger home

• Ideal for buyers planning to refinance or increase income within a few years

• Available on Conventional, FHA, and VA loans

Final Thoughts on Lender-Paid Buydowns

Lender-paid buydowns are a great way to reduce early mortgage payments — especially if seller-paid options aren’t available. Just keep in mind that you’ll be locking into a slightly higher long-term rate in exchange for short-term savings.

If you’re planning to refinance, sell, or boost your income in the next 1–3 years, a 1/0 or 2/1 buydown could be a smart play.

How I Can Help You

When it comes time to purchase a home, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.