Thinking about using a mortgage rate buydown to make your San Francisco purchase more affordable? You’re not alone. With higher home prices and frequent jumbo loans, many buyers and sellers are looking at buydowns as a practical way to ease monthly payments or get a deal across the finish line. In this guide, you’ll learn exactly how temporary and permanent buydowns work, what they cost, how lenders treat them, and how to decide if they make sense for you in San Francisco. Let’s dive in.
What a buydown is
A mortgage rate buydown lowers your interest rate in exchange for an upfront payment or a funded subsidy at closing. The money can come from you, the seller, a builder, or the lender. The result is a lower monthly principal and interest payment, either for a few years or for the life of the loan.
There are two main types:
- Temporary buydown. Your rate is lower for a set period, commonly 1 to 3 years. After that, it returns to the original note rate.
- Permanent buydown. You pay points at closing to reduce the note rate for the entire loan term.
Temporary vs. permanent buydowns
Temporary buydowns
- Common structures: 2-1 (rate reduced by 2% in year 1 and 1% in year 2), 1-0 (1 year, 1% off), or 3-2-1.
- How it works: A subsidy is deposited into an escrow at closing. Each month during the buydown, the escrow funds cover the difference between your reduced payment and the payment at the note rate.
- Best for: Short-term cashflow relief, bridging to expected income growth, or when a seller or builder offers an incentive.
Permanent buydowns (points)
- How it works: You pay discount points at closing to permanently reduce the interest rate. One point equals 1% of the loan amount. The rate reduction per point varies by lender and market.
- Best for: Lowering long-term interest cost if you expect to keep the loan long enough to break even.
How payments are calculated
Lenders use a standard formula to compute monthly principal and interest:
- Monthly payment = r × L ÷ [1 − (1 + r)^−n]
- r = monthly interest rate (annual rate ÷ 12)
- L = loan amount
- n = total number of monthly payments (360 for a 30-year loan)
For a temporary buydown, the subsidy equals the sum of monthly savings during the buydown period. For a permanent buydown, compare the upfront cost of points to the monthly savings to estimate a payback period.
San Francisco examples (illustrative)
The following examples use a 30-year fixed loan, 20% down, and a 6.50% note rate to show the scale of savings. These are sample calculations, not market quotes.
Example A: Condo-level price point
- Purchase price: $900,000
- Down payment: 20% ($180,000)
- Loan amount: $720,000
- Monthly P&I at 6.50%: about $4,554
2-1 temporary buydown tied to that note rate:
- Year 1 at 4.50%: payment about $3,649 → monthly savings vs. note rate: $905
- Year 2 at 5.50%: payment about $4,089 → monthly savings: $465
- Total subsidy required: $16,440 (about 2.3% of the loan)
Permanent points comparison using the same $16,440 budget:
- About 2.28 points on a $720,000 loan
- If that buys roughly a 0.57% rate reduction (example effect only), the payment would be about $4,286 → monthly savings $268
- Payback on $16,440 is about 5.1 years
Takeaway: The temporary buydown delivers larger early savings. Permanent points offer smaller monthly savings that last for the life of the loan.
Example B: Single-family price point
- Purchase price: $1,500,000
- Down payment: 20% ($300,000)
- Loan amount: $1,200,000
- Monthly P&I at 6.50%: about $7,590
2-1 temporary buydown tied to that note rate:
- Year 1 at 4.50%: payment about $6,082 → monthly savings $1,508
- Year 2 at 5.50%: payment about $6,815 → monthly savings $775
- Total subsidy required: about $27,396 (about 2.3% of the loan)
Permanent points comparison using the same $27,396 budget:
- About 2.28 points on a $1,200,000 loan
- Using a similar rate effect to Example A, the payment would be about $7,144 → monthly savings $446
- Payback on $27,396 is about 5.1 years
Takeaway: On larger San Francisco loans, the dollar value of a buydown grows quickly. A seller-funded 2-1 buydown can be a meaningful incentive worth tens of thousands of dollars.
Who can pay and how it shows up
- Buyer-paid. You bring funds to closing for points or a buydown.
- Seller- or builder-paid. Credited at closing and disclosed in your contract and closing documents.
- Lender credits. Sometimes you accept a slightly higher rate to lower closing costs; this is a different tradeoff than a buydown.
In every case, the lender must approve the structure and document the source and handling of funds.
Underwriting and loan type rules
- Qualification at note rate. Many lenders qualify you using the full note rate payment. Some programs allow qualifying using the reduced buydown payment if the subsidy is documented and fully funded. Confirm this early with your lender.
- Jumbo vs. conforming. San Francisco buyers often use jumbo financing. Jumbo point-to-rate pricing and lender overlays can differ from conforming loans, which affects both cost and qualifying.
- Government loans. FHA and VA have program-specific rules and limits for seller concessions and buydowns. Your lender will verify what is allowed for your scenario.
Practical implication: A temporary buydown can improve monthly cashflow without increasing the purchase price you qualify for. Always ask how your lender will underwrite the loan.
Tax and APR considerations
- Points and interest. Discount points on a primary residence may be deductible if IRS criteria are met. If a seller pays points on your behalf, treatment can differ.
- Temporary buydown funds. Seller-funded subsidies that cover the interest differential are generally not the same as discount points and may be treated differently for tax purposes.
- APR disclosure. Buydowns and points affect your APR and how loans compare side by side.
Tax rules and program guidelines can change. Plan to consult a tax professional for specific advice and rely on your lender’s current documentation for qualifying and disclosures.
When a buydown makes sense
A buydown may be a smart move if you:
- Need short-term payment relief while income rises in the next 1 to 3 years.
- Expect to refinance or sell before a long payback period would make points worthwhile.
- Receive a seller or builder credit that makes a temporary buydown low or no cost to you.
- Plan to hold the loan for many years and can break even on permanent points within your time horizon.
In San Francisco, where monthly P&I can dominate housing budgets, also remember HOA dues, property taxes, insurance, and any mortgage insurance. These costs affect your total payment and qualifying, regardless of a buydown.
Negotiation tips in San Francisco
- Show the math. Ask your agent to present clear, dollar-for-dollar comparisons of a seller credit for a buydown versus a price reduction. Many sellers are indifferent if net proceeds are similar.
- Match structure to your goal. If immediate affordability matters most, a 2-1 buydown can front-load savings. If long-term cost matters, compare permanent points.
- Anticipate lender rules. Get the lender’s stance on qualifying at the note rate versus reduced payment in writing when possible.
- Document everything. Ensure the purchase contract, lender approval, escrow instructions, and closing disclosure spell out who pays, how funds are held, and how they apply.
- Read the market. In multiple-offer situations, sellers may prefer a higher net price over concessions. In softer conditions, a seller-funded buydown can be a win-win incentive.
Questions to ask your lender
Use this quick list to structure your lender conversation:
- Will you qualify me using the reduced buydown payment or the full note rate? What documentation do you require if qualifying on the reduced payment is possible?
- What is the total, exact cost of the buydown or points, and where will it appear on my Loan Estimate and Closing Disclosure?
- If I buy permanent points, how much rate reduction does each point buy for this specific loan product? Can you share a point-to-rate table?
- If a seller funds a temporary buydown, where are the funds held and how are they applied each month?
- How do seller-paid buydowns affect my APR and any loan comparisons?
- Are there program limits on seller concessions for my loan type, including jumbo, conforming, FHA, or VA?
- How are points and buydown funds treated for taxes in my situation? Should I consult a tax advisor?
- How will a buydown interact with mortgage insurance, escrows, HOA dues, and property taxes when you calculate my total monthly payment and qualification?
Next steps
A well-structured buydown can be the difference between a stretch and a comfortable payment, especially on San Francisco price points. The key is to compare the real dollars: what it costs upfront, how much it saves each month, how long you will keep the loan, and how your lender will underwrite. If a seller or builder is willing to contribute, a temporary buydown can deliver meaningful early relief. If you plan to hold the loan for years, permanent points may provide better lifetime savings.
If you want a side-by-side analysis for your target price, loan type, and timeline, let’s talk through it together. I’ll run the numbers, coordinate with your lender, and position your offer to get the best mix of price and monthly payment for your goals.
Ready to model your options and negotiate the right structure for today’s market? Connect with Stacey Davis to schedule your free consultation.
FAQs
What is a 2-1 mortgage rate buydown in San Francisco?
- A 2-1 buydown lowers your interest rate by 2% in year 1 and 1% in year 2, then the rate returns to the original note rate, with the upfront subsidy covering the difference during those years.
Who can pay for a mortgage buydown on a San Francisco home?
- The buyer, seller, builder, or lender can fund a buydown, but the lender must approve and document the source and handling of funds in your closing documents.
How much does a 2-1 buydown typically cost on SF loans?
- It often totals a few percent of the loan amount; for example, the $900,000 and $1,500,000 scenarios above required about 2.3% of the loan as a subsidy.
Do buydowns help me qualify for a higher home price?
- Not always; many lenders qualify you at the full note rate payment, so a temporary buydown may improve cashflow without increasing your qualifying amount.
Are permanent points or temporary buydowns better in San Francisco?
- It depends on your time horizon; temporary buydowns front-load savings, while permanent points reduce costs for the life of the loan and need several years to break even.
How do HOA dues and taxes factor into a buydown decision?
- HOA dues, property taxes, insurance, and any mortgage insurance increase your total monthly payment and affect qualifying regardless of the buydown, so include them in your analysis.
Are buydown subsidies tax-deductible like points?
- Discount points may be deductible if IRS criteria are met, but temporary buydown subsidies can be treated differently; consult your tax professional for your specific situation.
