Wish your monthly payment were lower without waiting for rates to drop? In a high-cost market like San Carlos, even a small shift in your mortgage rate can make a big difference to your monthly budget. You can use a rate buydown to lower your payment, either for a few years or for the life of the loan. This guide breaks down how buydowns work, when they make sense, and how to use them in San Carlos negotiations. Let’s dive in.
Rate buydowns, simply explained
A rate buydown is when funds are paid up front to reduce your mortgage interest rate. You can do this temporarily for the first 1–3 years or permanently for the entire loan term. In San Carlos, where loan sizes are often large, buydowns can meaningfully improve affordability or help you ease into payments.
- One mortgage point = 1% of the loan amount.
- Each discount point typically lowers the interest rate by about 0.25 percentage points, but the exact effect varies by lender and market.
Temporary buydowns are often funded by the seller or builder to make a listing more attractive without a price cut. Permanent buydowns use points you pay at closing to lock in a lower rate for the life of the loan.
Temporary buydowns: how they work
Temporary buydowns reduce your interest rate for a set period, then your payment increases to the full note rate.
Common formats
- 2–1 buydown: rate reduced by 2.00% in year 1 and 1.00% in year 2, then you pay the full note rate from year 3 onward.
- 1–0 buydown: rate reduced for the first year only.
Mechanics and payment flow
A lump sum is placed into a buydown or escrow account at closing. The lender applies those funds to lower your monthly payment during the buydown period. Your permanent note rate stays the same, and the APR reflects the cost of the subsidy over time.
Pros and cautions
- Pros: Lower initial payments can help you transition into ownership or create cash flow flexibility early on.
- Cautions: Payments rise when the subsidy ends. Lenders often qualify you at the permanent note rate, not the reduced buydown rate, so it may not help you qualify unless your lender explicitly allows it. Ask your lender in writing how they will underwrite your loan and what reserves they require.
Permanent buydowns with points
Permanent buydowns use discount points you pay at closing to reduce your interest rate for the life of the loan. This is a trade-off between a larger upfront cost and lower interest paid over time.
Points and pricing basics
- You pay points at closing. The number of points and the rate reduction depend on lender pricing and market conditions.
- Sellers can sometimes fund points as a concession, subject to program limits.
Break-even example
- Purchase price: $1,500,000, 20% down, loan amount $1,200,000.
- One point costs 1% of the loan, so $12,000.
- If one point lowers the rate by about 0.25 percentage points, you would estimate your monthly savings and divide $12,000 by that savings to find your break-even timeline. If you plan to keep the loan beyond that point, permanent points can reduce total interest paid.
Always use current lender quotes to run the exact numbers. Rate, payment, and point values change with the market.
Seller-paid buydowns and concessions
In many negotiations, sellers offer a temporary buydown or pay points to help close the deal. These funds are treated as seller concessions and are limited by loan program rules.
- FHA has historically allowed up to 6% in seller concessions for eligible costs.
- VA has its own rules for concessions, often up to 4% for certain items.
- Conventional loans set limits that vary by down payment and occupancy.
Ask your lender to confirm the maximum allowed concession for your loan type and down payment, and confirm that a buydown is an eligible use.
Conforming vs jumbo in San Mateo County
San Carlos buyers frequently encounter prices above standard conforming limits. That can push you into jumbo financing, which follows different pricing and underwriting rules.
- Conforming loan limits are set by the FHFA and vary by county. Check the current San Mateo County limit when you shop.
- Jumbo lenders may price points and buydowns differently and can have unique rules for seller concessions and qualification.
- Many lenders qualify you at the permanent note rate even if you have a temporary buydown. Get written confirmation of how your lender will qualify your debt-to-income ratio.
APR, disclosures, and taxes
Your Loan Estimate and Closing Disclosure will show the APR, which accounts for the cost of points and any temporary subsidy. Do not compare only the first-year payment on a temporary buydown. Compare APRs, total costs, and your long-term plan.
For taxes, points you pay to obtain a mortgage on a primary residence are often treated as mortgage interest under IRS rules. Points paid by a seller can be treated differently. Tax outcomes depend on who pays, your loan purpose, and whether you itemize. Consult a tax advisor or IRS guidance before you decide.
Local factors in San Carlos
Monthly housing costs include principal and interest plus property taxes, insurance, and any HOA dues. In San Mateo County, the base property tax is around 1% of assessed value, and some areas include voter‑approved parcel taxes or Mello‑Roos. These costs matter when a temporary buydown ends and your payment increases.
Market dynamics also influence strategy. In a competitive seller’s market, sellers may prefer price over concessions. In a more balanced market, a seller-paid buydown can make your offer stand out without lowering the list price.
Step-by-step decision guide
- Clarify your time horizon. If you expect to keep the home and loan for many years, permanent points may pay off. If your horizon is shorter, a temporary buydown might fit better.
- Ask how you will be qualified. Will your lender qualify you at the note rate or the reduced temporary payment? Get it in writing.
- Confirm concession limits. Verify program caps for seller-paid costs for FHA, VA, conventional, or jumbo.
- Compare scenarios. Price reduction vs seller-paid buydown with the same seller cost. Look at cash flow, APR, and total interest.
- Check reserves and payment shock. Ensure your budget can handle the higher payment when a temporary buydown ends.
- Review tax impact. Ask a tax professional about deductibility of points and any seller-paid amounts.
Real-world example: 2–1 buydown
Assume a permanent note rate of 6.50%.
- Year 1 effective rate: 4.50%.
- Year 2 effective rate: 5.50%.
- Year 3 and beyond: 6.50%.
The seller funds a lump sum at closing equal to the present value of the interest subsidy for years 1 and 2. Your first-year payments are lower, second-year payments increase, and then you pay the full note-rate payment. On larger San Carlos loan amounts, the seller’s deposit can be sizable, so confirm concession limits for your loan type.
Price reduction vs buydown
If a seller is willing to spend a certain amount to close the gap, compare two paths:
- Price reduction: lowers your loan amount and payment for the life of the loan.
- Seller-paid buydown: can deliver bigger payment relief in the first years, which may matter for cash flow or if you plan to refinance or move.
There is no universal winner. Ask your lender for side-by-side estimates that show payment, APR, total interest, and cash to close for both options.
Ready to run your numbers?
A smart buydown can improve affordability in San Carlos when it matches your time horizon and loan program. Bring a financial lens to the decision, confirm underwriting and concession rules, and model multiple scenarios before you write an offer. If you want a local, investment-minded partner to help you weigh the trade-offs and negotiate seller-paid options, we are here to help.
Have questions or want to see tailored scenarios for a specific San Carlos listing? Connect with Daniel Fridman to get started.
FAQs
What is a mortgage rate buydown for San Carlos buyers?
- A buydown uses upfront funds to lower your mortgage rate temporarily for 1–3 years or permanently for the life of the loan, improving affordability in a high-cost market.
How does a 2–1 temporary buydown change payments?
- Your rate is reduced by 2% in year one and 1% in year two, then returns to the permanent note rate; payments rise after the buydown period ends.
Will a temporary buydown help me qualify for a loan?
- Many lenders qualify you at the permanent note rate rather than the reduced buydown rate, so confirm in writing how your lender will underwrite your debt-to-income ratio.
Can the seller pay for my buydown in San Carlos?
- Yes, seller-paid buydowns are common and treated as concessions, but loan programs cap the allowable amount and you must stay within those limits.
Are buydowns available on jumbo loans in San Mateo County?
- Many jumbo lenders allow buydowns, but pricing, concession limits, and underwriting rules vary by lender, so compare offers across multiple lenders.
How do discount points work for a permanent buydown?
- You pay points at closing to reduce the interest rate for the life of the loan, then estimate a break-even timeline by dividing the upfront cost by monthly savings.
Are mortgage points tax-deductible if I buy in San Carlos?
- Points you pay on a primary residence are often treated as mortgage interest under IRS rules, but treatment varies by who pays and your tax situation, so consult a tax advisor.
