If today’s mortgage rates have you rethinking your Redwood City home search, you are not alone. In a high-cost market like San Mateo County, even a small rate change can make a big difference in your monthly payment and peace of mind. The good news is you have options. Interest rate buydowns can lower your payment early on or for the life of your loan, and they can also help you craft a stronger offer. In this guide, you’ll learn exactly how buydowns work, what they cost, and how to use them wisely in Redwood City. Let’s dive in.
What is a mortgage rate buydown?
A rate buydown is a way to reduce your mortgage interest rate by paying money up front. You, the seller, or a builder can fund it. There are two main types you will see in Redwood City: temporary buydowns and permanent buydowns.
- Temporary buydowns lower your payment for the first 1 to 3 years, then your payment steps up to the full note rate.
- Permanent buydowns use discount points paid at closing to reduce your rate for the life of the loan.
For a clear, consumer-first overview of mortgage costs and choices, review the Consumer Financial Protection Bureau’s mortgage resources in Owning a Home.
Temporary vs. permanent: how they differ
Temporary buydowns
- Common patterns: 3-2-1 and 2-1.
- 3-2-1 means your effective rate is 3 percentage points lower in Year 1, 2 points lower in Year 2, and 1 point lower in Year 3. In Year 4, payments move to the full note rate.
- 2-1 means 2 percentage points lower in Year 1, 1 point lower in Year 2, then the full note rate from Year 3 onward.
- The buydown funds are usually deposited into a lender-controlled escrow at closing and applied to your payment each month.
Permanent buydowns (points)
- You or the seller pay “points” at closing to lower your interest rate for the entire loan term. One point equals 1% of the loan amount.
- The rate reduction per point varies by lender and market. Your lender will quote the exact tradeoff.
For program rules and lender standards, see Fannie Mae Single-Family and Freddie Mac Single-Family.
Why buydowns matter in Redwood City
San Mateo County is a high-payment market, so a small rate drop can produce meaningful savings. In a competitive neighborhood, a seller-funded buydown can also make your offer more attractive without lowering the sale price on record. If you plan to refinance later, a temporary buydown can bridge the gap while you settle in and watch the rate market.
Just remember that a buydown affects the interest part of the payment only. Your property taxes, homeowners insurance, HOA dues, and any PMI remain the same.
What do buydowns cost? A simple example
Here is an illustration to make the math tangible. Numbers are rounded for clarity.
- Loan amount: $960,000
- Loan term: 30-year fixed
- Note rate: 6.5%
- Monthly principal and interest at 6.5%: about $6,073
3-2-1 temporary buydown
- Year 1 at 3.5%: about $4,308 per month → monthly savings about $1,765
- Year 2 at 4.5%: about $4,865 per month → monthly savings about $1,208
- Year 3 at 5.5%: about $5,452 per month → monthly savings about $621
- Estimated total subsidy: about $43,000 over three years
2-1 temporary buydown
- Year 1 at 4.5%: about $4,865 per month → monthly savings about $1,208
- Year 2 at 5.5%: about $5,452 per month → monthly savings about $621
- Estimated total subsidy: about $22,000 over two years
Permanent buydown (points)
- Cost is quoted as points at closing. One point equals 1% of the loan amount. The exact rate reduction per point varies by day and by lender, so ask your lender for today’s pricing.
These figures are for illustration only. Your lender will compute exact payments, escrow requirements, and any fees associated with a buydown.
How lenders qualify you
Underwriting rules vary by lender and loan program.
- For temporary buydowns, some lenders qualify you at the full note rate. Others may allow qualification at the reduced payment for the buydown period if funds are fully escrowed and program conditions are met.
- For permanent buydowns, lenders use the reduced note rate to qualify.
Ask your lender early which rate they will use and how they will document the buydown. For program guidance, review Fannie Mae Single-Family and Freddie Mac Single-Family.
Seller concessions and program limits
If you plan to have the seller fund the buydown, confirm the concession limits for your loan type. Rules differ for conforming, FHA, VA, and USDA loans, and limits can change.
- FHA program information: HUD Single Family Housing
- VA home loan information: VA Home Loans
Your lender will tell you whether a temporary buydown counts toward the seller concession cap and how funds must be escrowed.
Risks and how to plan ahead
- Payment shock can hit when the buydown period ends. Build your budget to handle the full note-rate payment.
- Misunderstandings about who pays, how funds are held, or how you qualify can delay closing. Get lender confirmations in writing.
- Some sellers prefer price reductions instead of credits. Compare buyer savings and seller net proceeds before you negotiate.
For tax questions about discount points and seller-paid items, see IRS guidance on Home Mortgage Points and speak with a tax professional.
Redwood City offer strategies that work
In Redwood City’s higher-priced neighborhoods, a smartly structured buydown can create a win-win.
- Use a seller-funded temporary buydown instead of a price cut. It preserves the recorded sale price while lowering your early payments.
- Combine a modest price reduction with a smaller buydown if that splits the difference for both sides.
- In a multiple-offer situation, a buydown can help your offer stand out compared to a lower price from another buyer.
How to draft a clear, clean offer
Spell out the mechanics in your purchase agreement so everyone aligns early.
- State the exact dollar amount the seller will credit for the buydown.
- Note that funds will be placed in a lender-approved escrow at closing.
- Identify who pays any lender setup fees for the buydown.
- Reference the structure, such as a 2-1 or 3-2-1 temporary buydown, per lender instructions.
- Tie your financing contingency to lender acceptance of the buydown and the qualifying approach.
Quick checklist for buyers and sellers
- Confirm loan program and seller concession limits before you write the offer.
- Ask your lender which rate they will use to qualify you and whether funds must be escrowed.
- Include clear contract language for the buydown amount and responsibilities.
- Run a seller net sheet comparing a price cut versus a buydown credit.
- Build your budget to handle the full payment after the buydown period ends.
- Consult a tax professional on the treatment of points or seller-paid items.
Is a temporary or permanent buydown right for you?
- Choose a temporary buydown if you expect higher income soon, plan to refinance in the near term, or want near-term payment relief.
- Choose a permanent buydown if you plan to hold the mortgage long enough to recoup the upfront cost of points.
- Ask your lender for a break-even analysis so you can compare options using current pricing.
Lowering your rate the right way can help you afford the Redwood City home you want and negotiate with confidence. If you would like a calm, local perspective on how to structure your offer, align with your lender, and present terms that sellers respect, let’s talk. Reach out to Lynne Mercer to map your path forward.
FAQs
What is the difference between a 2-1 and 3-2-1 buydown?
- A 2-1 lowers your rate by 2% in Year 1 and 1% in Year 2, then your payment moves to the full rate; a 3-2-1 lowers it by 3%, 2%, and 1% over three years before reaching the full rate.
How much could a 2-1 buydown cost on a $960,000 loan?
- Using the example above at a 6.5% note rate, a 2-1 buydown subsidy is roughly $22,000 over two years, with exact amounts set by lender calculations.
Do buydowns change taxes, HOA dues, or PMI in Redwood City?
- No; a buydown affects the interest part of your mortgage payment only, so property taxes, insurance, HOA dues, and any PMI remain the same.
Can a seller pay for my buydown on FHA or VA loans?
- Often yes within program limits, but concession caps and rules vary, so confirm with your lender and review FHA and VA guidance.
What happens if I refinance before a temporary buydown ends?
- If you refinance, any remaining buydown funds in escrow are handled per your lender’s policy and loan documents, so ask your lender how they treat unused funds.
