Mortgage Points and Rate Buydowns: How They Work in a California Purchase

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

Discount points are an upfront fee you pay the lender at closing to get a lower interest rate for the life of the loan; each point costs 1% of the loan amount. A temporary buydown, such as a 2-1 or 1-0, instead lowers your payment for the first year or two using money deposited at closing, and then the payment rises to the full note rate. Either one can be paid by you or, within loan-program limits, by the seller, and both show up on your Closing Disclosure.

Discount points: a permanent rate reduction

The Consumer Financial Protection Bureau (CFPB) describes discount points as a fee paid at closing that lowers your interest rate; one point on a $100,000 loan costs $1,000 (CFPB). How much the rate drops per point isn’t fixed. It depends on the lender’s pricing that day, so compare the same loan with and without points from each lender you’re considering.

Lender credits work the other way. You accept a higher rate and the lender credits money toward your closing costs. The CFPB notes they’re sometimes called "negative points."

When points make sense. CFPB says points tend to pay off when you keep the loan a long time, and suggests asking a loan officer to compare total costs over short, likely and long time frames. A simple check you can do yourself:

• Cost of the points ÷ monthly payment savings = months to break even.
• If you expect to sell or refinance before that point, the points probably won’t pay for themselves.

That’s arithmetic, not a forecast. Your loan officer can run the numbers on real pricing; we don’t quote rates.

Temporary buydowns: 2-1 and 1-0

A temporary buydown lowers the rate, and the payment, for an initial period. Someone (you, the seller, a builder or the lender) deposits funds at closing to cover the difference between the reduced payment and the full payment. After the buydown period ends, you pay the full amount set in the note.

The names describe the reduction by year:

Here "point" means a percentage point of interest. The 2-1 and 1-0 labels are industry terms; Fannie Mae classifies buydowns of 2 percentage points or less lasting 2 years or less as "moderate."

Cost. The buydown deposit equals the total of the monthly payment differences over the buydown period. Your lender calculates the exact figure from the note rate and loan amount.

Fannie Mae’s rules for temporary buydowns

For conventional loans sold to Fannie Mae, the Selling Guide (B2-1.4-04, dated August 7, 2024) sets these limits:

• You qualify at the note rate, not the bought-down rate. A buydown doesn’t stretch how much you can borrow.
• The rate reduction can’t exceed 3 percentage points, and the rate can’t rise more than 1 percentage point per year.
• The buydown period can’t be longer than 3 years.
• Principal residences and second homes are eligible. Investment properties and cash-out refinances aren’t.
• The plan must be a written agreement between whoever provides the funds and the borrower. The note shows the permanent payment terms.
• Buydown funds must be held in a custodial account and can’t be used to cover past-due payments or reduce the loan-to-value ratio.

FHA, VA and jumbo lenders have their own temporary-buydown rules. Ask your lender for the current requirements for your loan type.

Seller-paid points and buydowns: the concession limits

When a seller pays for points or a buydown, it counts against the loan program’s limit on seller or "interested party" contributions. Here’s how the main programs handle it.

Sources: Fannie Mae B3-4.1-02, May 7, 2025; FHA handbook text on interested party contributions as published by HUD with Mortgagee Letter 2016-11 (confirm against the current HUD Handbook 4000.1); VA funding fee and closing costs; USDA proposed rule, Federal Register, April 20, 2026.

How each program treats a buydown:

• Fannie Mae lists temporary and permanent buydowns funded by an interested party as interested party contributions. The cost of the subsidy is what counts. If contributions go over the limit, Fannie Mae treats the excess as a sales concession: it’s subtracted from the price and the loan-to-value is recalculated (B3-4.1-02).
• VA lists loan discount points among the closing costs a buyer and seller can negotiate. Its consumer page doesn’t say whether seller-paid points count toward the 4% concession cap, so get your lender’s answer in writing before you set the size of the credit.
• FHA’s handbook text allows interested parties to contribute toward discount points within the 6% limit. Confirm the current rules for an FHA temporary buydown with your lender.

For the broader picture, including whether a credit or a price reduction leaves you better off, see our guide to seller concessions in California. We don’t repeat that math here.

Writing a buydown into a California offer

Seller help is often negotiated as a credit toward the buyer’s closing costs in the offer, which can then go toward points or a buydown if the loan program allows. Our guide to the California Residential Purchase Agreement explains where those terms go. A few practical points:

1. Get the lender’s numbers before you write the offer. Ask for the cost of one point, the cost of a 2-1 and a 1-0 buydown, and how much credit your program allows at your planned down payment.
2. Size the credit to the limit. A credit above the program limit may not be usable, and on a Fannie Mae loan the excess reduces the price used for loan-to-value.
3. Watch the appraisal. Fannie Mae’s limits are based on the lower of price or appraised value, so a low appraisal can shrink the usable credit. See the appraisal contingency.
4. Put the buydown agreement in the file early. Fannie Mae requires a written buydown agreement and disclosure of its terms to the appraiser and mortgage insurer.
5. Leave time in your loan contingency. Changes to points or credits late in escrow can mean revised disclosures, so ask your lender how a change would affect your closing date. Our loan contingency guide and escrow timeline cover the deadlines.

Which side pays which escrow and title costs is a separate negotiation; see who pays closing costs in California.

How points and credits appear on your Closing Disclosure

You must receive the Closing Disclosure at least three business days before closing (CFPB). Check these lines:

Sources: CFPB Closing Disclosure explainer; CFPB on points and lender credits. Points also appear in Section A of your Loan Estimate, so compare the two.

A temporary buydown deposit can be labeled differently depending on who funds it. Ask your lender and escrow officer to show you where it appears before you sign.

A tax note on points

The IRS says points on a loan to buy your main home can generally be deducted in the year paid if you itemize and meet several tests, such as the points being clearly shown on the settlement statement and computed as a percentage of the loan. Points the seller pays are treated as paid by you, but you subtract them from your basis in the home (IRS Topic 504). Ask your tax adviser how this applies to you.

Questions people ask

How much does one mortgage point cost?

One point costs 1% of the loan amount, so a point on a $700,000 loan is $7,000 (CFPB). How much it lowers the rate depends on the lender’s pricing.

What is a 2-1 buydown?

Your rate is 2 percentage points below the note rate in year one and 1 point below in year two, then the full note rate from year three. Funds deposited at closing cover the difference.

Do I qualify at the lower buydown rate?

Not on a Fannie Mae loan. Fannie Mae requires lenders to qualify you at the note rate (B2-1.4-04).

Can the seller pay for my buydown?

Yes, within your loan program’s limit. On a Fannie Mae loan, a seller-funded buydown counts as an interested party contribution, capped at 3%, 6% or 9% depending on loan-to-value (B3-4.1-02).

Can I use a temporary buydown on an investment property?

Not on a Fannie Mae loan. Investor properties and cash-out refinances are ineligible (B2-1.4-04).

Are points better than a temporary buydown?

They solve different problems. Points lower the rate for the life of the loan; a temporary buydown lowers payments only at the start. Compare the cost of each against how long you expect to keep the loan.

Where do I see points on my Closing Disclosure?

Page 2, Section A, Origination Charges, listed as a percentage of the loan amount (CFPB).

Are mortgage points tax-deductible?

Often, for a main-home purchase if you itemize and meet IRS tests (IRS Topic 504). Confirm with a tax adviser.

Sources & notes

1. CFPB: Discount points and lender credits.
2. CFPB: Closing Disclosure explainer.
3. Fannie Mae Selling Guide B2-1.4-04: Temporary interest rate buydowns (Aug. 7, 2024).
4. Fannie Mae Selling Guide B3-4.1-02: Interested party contributions (May 7, 2025).
5. HUD: FHA handbook text on interested party contributions, published with ML 2016-11, and the current HUD Handbook 4000.1.
6. VA: Funding fee and closing costs.
7. Federal Register: USDA proposed rule on limited party concessions (April 20, 2026).
8. IRS Topic 504: Home mortgage points.

The FHA figure comes from HUD handbook text published in 2016; we couldn’t open the matching section of the current handbook, so confirm it with your lender. FHA and VA temporary-buydown rules aren’t detailed here. The break-even formula and dollar examples are arithmetic, not rate quotes. General information, not legal, tax or lending advice. Updated November 2026. Primary sources are linked in this guide.

Related: Seller concessions · Who pays closing costs · FHA vs. conventional loans · Buy with Diamond