A permanent buydown is a mortgage financing strategy where a buyer (or seller) pays an upfront fee to permanently lower the interest rate on a loan. Unlike temporary buydowns, which only reduce the rate for the initial years of the loan, a permanent buydown provides a lasting benefit for the entire life of the mortgage. This is typically achieved by purchasing discount points.
How Permanent Buydowns Work
Lenders offer discount points, which are essentially prepaid interest. When you buy discount points, you pay a certain percentage of the loan amount upfront in exchange for a lower interest rate. For instance, paying one discount point typically lowers the interest rate by 0.25% to 1%, depending on market conditions and the lender's pricing.
The decision to purchase discount points (i.e., implement a permanent buydown) is a financial calculation. You need to determine if the upfront cost is justified by the long-term savings in monthly payments and total interest paid over the life of the loan.
Key Components in the Calculation
Initial Interest Rate: The advertised or standard interest rate before any buydown.
Buydown Interest Rate: The reduced interest rate achieved by purchasing discount points.
Buydown Duration: For a permanent buydown, this is the entire Loan Term. However, we still ask for it to ensure clarity, though the calculation uses the full loan term.
Loan Amount: The principal amount borrowed.
Loan Term: The total number of years over which the loan will be repaid.
The Math Behind the Calculation
Our calculator estimates the potential savings of a permanent buydown. It compares the monthly payments and total interest paid for a loan at the initial rate versus a loan at the buydown rate.
The monthly mortgage payment (P&I – Principal and Interest) is calculated using the standard formula:
$$ M = P \left[ \frac{i(1+i)^n}{(1+i)^n – 1} \right] $$
Where:
M = Monthly Payment
P = Principal Loan Amount
i = Monthly Interest Rate (Annual Rate / 12)
n = Total Number of Payments (Loan Term in Years * 12)
The calculator computes:
Monthly payment at the Initial Interest Rate.
Total interest paid over the Loan Term at the Initial Interest Rate.
Monthly payment at the Buydown Interest Rate.
Total interest paid over the Loan Term at the Buydown Interest Rate.
The difference in monthly payments.
The difference in total interest paid over the loan term.
The "Savings" displayed represents the total reduction in interest paid over the life of the loan due to the permanent buydown.
When to Consider a Permanent Buydown
A permanent buydown is most beneficial for borrowers who:
Plan to stay in their home for a significant portion, or the entirety, of the loan term.
Want to reduce their monthly mortgage payment permanently.
Are looking to lower the total interest paid over the life of the loan.
Have the available funds for the upfront cost of discount points.
It's crucial to compare the upfront cost of the discount points with the total savings. Divide the cost of the points by the annual savings in interest to estimate your break-even point. If you plan to sell or refinance before reaching this break-even point, a temporary buydown or no buydown might be more suitable.
function calculateMonthlyPayment(principal, annualRate, termYears) {
var monthlyRate = (annualRate / 100) / 12;
var numberOfPayments = termYears * 12;
var payment = 0;
if (monthlyRate > 0) {
payment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
} else {
// If rate is 0, payment is just principal divided by number of payments
payment = principal / numberOfPayments;
}
return payment;
}
function calculateBuydown() {
var initialRate = parseFloat(document.getElementById("initialRate").value);
var buydownRate = parseFloat(document.getElementById("buydownRate").value);
var buydownDuration = parseFloat(document.getElementById("buydownDuration").value); // This is for context, permanent uses full loan term
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(initialRate) || isNaN(buydownRate) || isNaN(loanAmount) || isNaN(loanTerm) || initialRate < 0 || buydownRate < 0 || loanAmount <= 0 || loanTerm = initialRate) {
resultDiv.innerHTML = "Buydown rate must be lower than the initial rate.";
return;
}
// Calculate payments and total interest for initial rate
var initialMonthlyPayment = calculateMonthlyPayment(loanAmount, initialRate, loanTerm);
var initialTotalInterest = (initialMonthlyPayment * loanTerm * 12) – loanAmount;
// Calculate payments and total interest for buydown rate
var buydownMonthlyPayment = calculateMonthlyPayment(loanAmount, buydownRate, loanTerm);
var buydownTotalInterest = (buydownMonthlyPayment * loanTerm * 12) – loanAmount;
// Calculate savings
var monthlyPaymentDifference = initialMonthlyPayment – buydownMonthlyPayment;
var totalInterestSavings = initialTotalInterest – buydownTotalInterest;
// Format results for display
var formattedMonthlyPaymentDifference = "$" + monthlyPaymentDifference.toFixed(2);
var formattedTotalInterestSavings = "$" + totalInterestSavings.toFixed(2);
resultDiv.innerHTML = `
Estimated Savings
Monthly Payment Reduction: ${formattedMonthlyPaymentDifference}
Total Interest Savings: ${formattedTotalInterestSavings}
(Based on a ${loanTerm}-year loan term)
`;
}