The rate set on day one. The buydown never changes this.
Payments year by year
The borrower's payment steps up each year until it reaches the full note-rate payment.
| Year | Rate paid | Borrower pays / mo | Note-rate pmt | Gap / mo | × Months | Paid from buydown |
|---|---|---|---|---|---|---|
| 1 | 4.875% | $2,381.44 | $2,956.18 | $574.74 | 12 | $6,897 |
| 2 | 5.875% | $2,661.92 | $2,956.18 | $294.26 | 12 | $3,531 |
| 3onward | 6.875% note rate | $2,956.18 | $2,956.18 | — | — | — |
| Total prepaid into the buydown account | $10,428 | |||||
Every month, the lender still gets the full note-rate payment
In month one the borrower writes a smaller check; the buydown account tops it up so the lender receives the full $2,956.18.
Where the buydown cost comes from
Two payments are calculated on the same loan amount and term: one at the note rate, one at the reduced rate. The difference, times 12 months, is what gets prepaid for that year. Add the years together and you have the cost.
Same dollars as a price cut?
If the seller spent the same $10,428 as a price reduction instead, the buyer's monthly savings would last the whole term — but be far smaller.
A buydown front-loads the relief; a price cut spreads it thin. That gap is the pitch.
The interest is still charged at the note rate
This is the part agents miss. The lender amortizes the loan at the note rate from the first payment. The buydown doesn't erase interest; it prepays part of it so the borrower writes a smaller check.
- Full note-rate interest each month, amortized on the original schedule.
- The buydown account subsidizes the gap, not the rate itself.
- Usually the seller or builder, as a concession.
- Sometimes the lender, via a credit at closing.
- The borrower qualifies at the note rate (or as the program requires), not the year-one rate.
- If the loan is refinanced or paid off before the buydown runs out, the unused balance is typically credited toward the payoff. Confirm with the loan's specific terms.
- Seller and builder concessions toward a buydown count against the program's interested-party contribution limit.
How to bring it up with a seller
"Would you be open to an idea that might get you more offers without cutting your price?"
Then show them the buydown cost above next to what a price reduction of the same amount would do to the buyer's payment. Same dollars out of the seller's pocket — but the buydown makes the home feel far more affordable on day one.