Jump to a section
A temporary buydown and a permanent rate buydown solve different problems. A temporary arrangement subsidizes the borrower’s payments for a defined period. Paying discount points for a permanent reduction changes the note-rate pricing selected at closing. I compare both against the payment the buyer can sustain after any temporary assistance ends.
The decision in the purchase conversation
A payment-sensitive buyer was weighing a 3-2-1 arrangement against using seller funds for a permanently lower rate. The useful question was not which offer had the lowest first-year payment. It was whether the credit should help with near-term cash flow or reduce the ongoing contractual cost of the loan.
The case notes do not record a completed closing or an established winner. I would need current pricing, the actual buydown agreement and a full payment comparison before recommending one structure for that buyer.
Put the later payment on the first page
Under a typical 3-2-1 structure, the borrower’s contribution to the payment is calculated using a rate three percentage points below the note rate in year one, two below in year two and one below in year three. The subsidy makes up the difference. The note rate itself is not reduced by that temporary arrangement.
Fannie Mae requires qualification using the note rate for its temporary buydowns and limits eligible transactions and plan terms. Seller-funded subsidies also interact with contribution limits. See Fannie Mae’s temporary buydown requirements (new tab). A particular lender must confirm its available program.
I would show the full payment from the start, including taxes, insurance, mortgage insurance and association dues. A household should know what happens when the assistance steps down without relying on a future refinance, a hoped-for raise or a change in home value.
Compare the use of the same seller dollars
- Temporary assistance: show the buyer’s payment contribution for each year, the subsidy cost and the payment after the subsidy ends.
- Permanent reduction: show the note rate, APR, points and the full payment with the same property-expense assumptions.
- Another allocation: investigate whether permitted closing costs are a more useful use of the available credit.
A seller contribution can feel like money that does not belong to the buyer’s decision. It still has an economic use. If the contract and program allow alternative allocations, I would show what the buyer gives up by selecting one rather than another.
Test an earlier payoff
Suppose the buyer sells or refinances before the expected holding period. Ask how unused temporary buydown funds are handled under the written agreement. Do not assume a cash refund. With permanent points, compare the upfront amount with the benefit actually received before payoff.
I would also test keeping the loan much longer than expected. That makes the ongoing payment difference visible. There is no single time horizon that proves which arrangement is better for everyone; the relevant range comes from the buyer’s real plans and uncertainty.
When I would slow down
If the only comfortable payment is the subsidized first-year amount, we need to revisit the purchase budget. Temporary assistance can help with a genuine transition, but it should not disguise a lasting mismatch between housing costs and household cash flow.
Can I count on refinancing before the higher payment arrives? No future refinance is guaranteed. Eligibility, value, rates and costs will need a fresh review. I want the purchase to make sense under the loan being signed.
Bring the seller-credit proposal and both written payment schedules. We can compare the same dollars, the same property expenses and a realistic holding period, then decide which problem the credit should solve.
Published September 13, 2026. Adapted from an origination discussion I worked through. Identifying details are omitted. Figures describe the discussion or clearly stated calculations, not current loan offers or guaranteed outcomes. Program, property and borrower requirements need an individual review. Nick Cunningham, Loan Officer, NMLS #907393. Mortgage services through Golden Bay Mortgage Group.
