How mortgage rate buy-downs work for Farragut buyers

When rates won't cooperate, a buy-down is the lever most Farragut buyers reach for next. It can shave hundreds off a monthly payment in the first year, or quietly drop your rate for the life of the loan — but it isn't free, and it isn't always the right call. Here's how the two main flavors work, what they actually cost, and how the math compares to the simpler move of asking for a price cut instead.

What a mortgage rate buy-down actually is

A buy-down is a one-time payment to your lender, made at closing, that lowers your effective interest rate. Someone hands the lender a chunk of money up front — usually the seller, sometimes a builder, occasionally the buyer — and in exchange the lender accepts a smaller monthly payment from the borrower than the note rate alone would require. There are two structures you'll see in a Farragut purchase agreement: a temporary buy-down, where the relief lasts one to three years, and a permanent buy-down, where the rate drops for the entire life of the loan.

Temporary buy-downs: the 2-1 and the 3-2-1

The most common temporary structure right now is the 2-1 buy-down. Your interest rate is reduced by two percentage points in year one and by one percentage point in year two, then it returns to the full note rate from year three through year thirty. A 3-2-1 works the same way but stretches the relief over the first three years — three points off in year one, two off in year two, one off in year three.

Mechanically, the loan is still written at the full note rate. The buy-down funds sit in an escrow account, and each month the lender pulls the difference between what the borrower owes at the reduced rate and what the note actually requires. The buyer's out-of-pocket payment is lower; the principal balance keeps amortizing as if nothing unusual were happening. When the escrow account runs dry — typically at month 24 on a 2-1 — the buyer takes over the full payment and the loan continues normally to maturity.

Temporary buy-downs are paid for at closing in a lump sum. On a typical Farragut transaction, that lump sum is somewhere between one and three percent of the loan amount, depending on the rate environment and the structure. We'll put a real number on it in a moment.

Permanent buy-downs: paying for a lower rate forever

A permanent buy-down is what most lenders call discount points. One point equals one percent of the loan amount, paid at closing, and it buys roughly a quarter-point reduction in your interest rate for the entire life of the loan. The exact ratio varies week to week — sometimes a point gets you 0.20 percent, sometimes 0.30 — but the rule of thumb most loan officers I work with in Knoxville quote is one point for a quarter point, four points for a full point off the rate.

Unlike a temporary buy-down, the savings here don't expire. If you pay points to drop your rate from 7.00 to 6.00 percent and you stay in the loan for thirty years, you collect that savings 360 times. The trade-off is that the savings per month are smaller, and the upfront cost is larger. The math question is always the same: how long do you have to hold the loan before the monthly savings repay the upfront cost? That number is called the break-even, and on most permanent buy-downs in spring 2026 it lands somewhere between four and seven years.

The math: a $650,000 Farragut home, three ways

The cleanest way to see what's actually happening is to put real numbers on a real Farragut scenario. Imagine a $650,000 home, twenty percent down, a $520,000 thirty-year fixed loan, and a starting note rate of seven percent — close to where prime borrowers are landing this spring. Let's compare three things a buyer and seller might negotiate.

$650,000 Farragut home · 20% down · $520,000 · 30-year fixed · 7.00% note rate

	A · Do nothing	B · Seller-paid 2-1 buy-down	C · Equivalent price cut
Loan amount	$520,000	$520,000	$507,868
Year 1 P&I	$3,460/mo (7.00%)	$2,791/mo (5.00%)	$3,379/mo (7.00%)
Year 2 P&I	$3,460/mo	$3,118/mo (6.00%)	$3,379/mo
Year 3+ P&I	$3,460/mo	$3,460/mo (back to 7.00%)	$3,379/mo (for 30 years)
Seller cost at closing	—	~$12,132 buy-down escrow	~$12,132 off list price
Buyer cash savings, first 2 yrs	—	$12,132	$1,944
Buyer cash savings, full 30 yrs	—	$12,132	$29,160

Payments above are principal and interest only. Taxes, insurance, PMI, and HOA are not included and will change the actual monthly outlay. All rates, payments, costs, and savings figures are illustrative only — they are not a rate quote and not advice. Hilary is a Realtor, not a mortgage professional. Confirm every number with a licensed mortgage loan officer running your actual loan application.

Two things should jump out. In Scenario B, the seller spends the same roughly $12,000 they'd have spent on a price cut, but the buyer feels almost seven hundred dollars a month of relief in year one. In Scenario C, that same $12,000 quietly compounds into about $29,000 of payment savings over thirty years — but the monthly relief is small enough that you might not notice it.

When a buy-down beats a price reduction

A temporary buy-down wins when the buyer's pain is concentrated in the first year or two. That's when first-time buyers in Farragut feel rate-squeezed hardest — moving costs, new-home appliances, a leaky water heater nobody warned them about. Front-loading the relief is the entire point.

A buy-down also wins when both sides quietly suspect rates are going to drop within a few years. If the buyer can ride a discounted payment through year one and year two, and then refinance into a permanently lower rate before the buy-down expires, they end up paying the lower rate the whole time. The unused buy-down escrow is typically refunded as a principal reduction or a closing-cost credit when the original loan is paid off — so the money doesn't disappear, it just changes pockets.

And a buy-down wins on the listing side, too. A seller who's already willing to come off price by $12,000 may move a listing faster by re-framing that concession as a buy-down. "Two-point rate relief in year one" reads to a buyer like a real number; "twelve thousand off" reads like the seller was overpriced to begin with. Whether that framing is fair is a separate question — but you can guess which one moves a stuck listing in week three.

When a price reduction wins

A straight price cut wins when the buyer plans to hold the home and the loan for the long haul. Every dollar off the purchase price is a dollar off the principal balance, and every dollar of principal you don't owe is a dollar of interest you don't pay over thirty years. The cumulative savings on a price cut almost always exceed the cumulative savings on a temporary buy-down — but only if the buyer is still there to collect them.

It also wins when there's no realistic refinance exit. If you genuinely believe rates will stay where they are or climb, a 2-1 buy-down just buys you two years before the full payment kicks in. Better to take the smaller permanent reduction and budget around it from day one.

The third case where a price cut wins is on appraisal-sensitive deals. A $12,000 price reduction lowers the comp the appraiser writes down; a $12,000 seller credit toward a buy-down doesn't. In a falling-comp neighborhood that's a real downside to the buy-down approach, and worth flagging to your Farragut listing agent before you commit to either path.

A quick note on new construction

If you're shopping new construction anywhere around Farragut, Hardin Valley, or Northshore, you'll see buy-downs on almost every builder incentive sheet — usually in the form of "promotional rate, 5.99% year one" or similar. That's a 2-1 or 3-2-1 quietly subsidizing the first couple of years to make the headline rate look softer. The math is the same as the seller-funded version above; the only difference is who's funding the escrow. Read the fine print on whether the rate is locked, what happens if you don't close by a certain date, and whether the incentive walks if you bring your own lender.

If you're trying to figure out whether the bigger lever for your situation is rate, price, or term, I'm always up for running the numbers against a specific listing. The four numbers I walk first-time buyers through apply here too — and a half-hour at a kitchen table can be the difference between paying for the right kind of relief and the wrong kind. Reach out and we'll model it together.