If you are comparing mortgage rate buydowns and points for a Pasadena home purchase, you are not alone. With higher local prices and a mix of conforming and jumbo loans, choosing the right strategy can save you real money. In this guide, you will learn how each option works, what they cost, and when each makes sense in the Pasadena market. Let’s dive in.
Points vs. buydowns: the basics
Discount points (permanent)
A discount point is a prepaid fee equal to 1% of your loan amount that lowers your interest rate for the life of the loan. For example, 1 point on an $800,000 loan costs $8,000. A common rule of thumb is that 1 point might reduce a 30-year fixed rate by about 0.25%, but actual pricing depends on your lender, loan type, credit, and market conditions. For a plain-English primer, review the Consumer Financial Protection Bureau’s overview of how discount points work.
Temporary buydowns (short-term)
A temporary buydown lowers your interest rate for an initial period, then the loan returns to the original note rate. A common structure is a 2-1 buydown: your rate is 2% lower in year one, 1% lower in year two, and then it reverts in year three. The cost is the total subsidy needed to cover the payment difference and is often paid by the seller or builder as a concession, subject to loan program rules.
Local examples: how the savings add up
Permanent points example
- Scenario: 30-year fixed, $800,000 loan, baseline rate 6.50%. Paying 1 point lowers the rate to about 6.25% for illustration.
- Cost of 1 point: $8,000.
- Monthly principal and interest at 6.50%: about $5,056.
- Monthly principal and interest at 6.25%: about $4,936.
- Monthly savings: about $120.
- Simple break-even: $8,000 divided by $120 is about 66 months, or 5.5 years.
If you expect to hold the loan longer than 5.5 years, a permanent point can make sense. If you plan to refinance or sell sooner, you may not recover the upfront cost.
Temporary 2-1 buydown example
- Note rate: 6.50% on an $800,000 loan.
- Year 1 payment calculated at 4.50%, year 2 at 5.50%, and year 3+ at 6.50%.
- The upfront cost equals the present value of the payment reductions in years 1 and 2.
- In Pasadena, sellers sometimes fund this subsidy to improve a buyer’s early-year affordability without changing the contract price.
Your lender will provide the exact subsidy amount and how it is held and applied to your payments.
When permanent points make sense in Pasadena
- You plan to stay in the home and keep the loan beyond the break-even period.
- You want to lock in lower interest costs for the long term.
- You have enough cash to cover points without hurting your down payment or emergency funds.
- You believe rates will stay the same or rise, making a refinance less likely.
When a temporary buydown is a better fit
- You need lower payments in the first 1 to 2 years to navigate a relocation or a new role.
- You expect income growth or a refinance before the buydown expires.
- You want a seller to help fund your early payments through concessions instead of a price cut.
- You prefer flexibility and do not want to commit extra cash to permanent points.
Program rules and seller concessions to know
Loan program and lender rules control who can pay for buydowns and how much. Conforming loans follow Fannie Mae and Freddie Mac guidelines on seller contributions and disclosures. Jumbo loans can price points and buydowns differently, and each lender may have its own limits. Government loans like FHA and VA have specific concession rules.
- For general program references, see the Fannie Mae Selling Guide and Freddie Mac resources.
- Temporary buydowns require lender approval and documentation on how funds are held and applied.
- Qualification typically uses the note rate, not the reduced buydown rate, unless a specific product allows otherwise.
- Maximum seller concessions often fall in the 3 to 6 percent range depending on program and down payment. Ask your lender for the exact limit for your loan.
Taxes 101: how points and buydowns are treated
Under federal rules, points paid by a buyer for the purchase of a principal residence may be deductible in the year paid if certain IRS tests are met. Points paid in a refinance are usually deducted over the life of the loan. Seller-paid points that benefit the buyer may be treated differently, so you need professional advice for your situation. Review the IRS summary on home mortgage points for general guidance.
California often conforms to federal rules, but not always. For state-specific treatment, see the California Franchise Tax Board’s information on itemized deductions and consult a tax professional. Keep your Closing Disclosure and settlement statements so you can document who paid what at closing.
Pasadena market tips for buyers and sellers
- Points cost more in dollars on larger loans. With Pasadena’s higher prices, 1 point can be a significant check at closing.
- Jumbo pricing varies by lender. In high-cost areas like Los Angeles County, shop quotes to find the best point-to-rate tradeoff.
- Seller-funded buydowns are a practical negotiation tool. They can boost early affordability for buyers without changing the contract price.
- Appraisers focus on comparable sales. Large concessions must be disclosed and can invite extra scrutiny from underwriters.
For current rate context, check Freddie Mac’s Primary Mortgage Market Survey, then use your lender’s quote to model savings and break-even for your exact scenario.
How to decide: a quick checklist
- Get two to three lender quotes showing the cost to buy down the rate with points and a temporary buydown option.
- Calculate simple break-even on points and compare it to how long you expect to keep the loan.
- Ask your lender for your loan program’s seller concession limit and qualifying rules.
- Confirm how any seller credit or buydown will be shown on your Closing Disclosure.
- Review tax implications with a CPA, especially for seller-paid points and refinances.
- Align the choice with your plans. Use permanent points if you will stay long term. Consider a temporary buydown if you expect income growth or a refinance.
Work with a local, mortgage-savvy guide
Choosing between permanent points and a temporary buydown can shape both your monthly payment and your long-term costs. If you want calm, clear guidance tailored to Pasadena and Northeast LA, our team can help you structure an offer, coordinate with your lender, and negotiate the right concessions for your loan type. To talk through scenarios with a local expert, connect with The Kinkade Group.
FAQs
What is the main difference between mortgage points and a temporary buydown?
- Points permanently lower your rate for the full loan term, while a temporary buydown lowers your rate only for the first one to two years before returning to the note rate.
How do seller-paid buydowns work in Pasadena home purchases?
- Sellers can fund a temporary buydown or pay points as a concession within program limits, and the details must be disclosed and approved by the lender.
Are discount points tax deductible for California buyers?
- Points on a primary home purchase may be deductible in the year paid if IRS tests are met, while refinance points are usually amortized; ask a CPA about California treatment.
How do I calculate break-even on paying points?
- Divide the upfront cost of points by the monthly payment savings to get the number of months to recover your cost, then compare it to how long you plan to keep the loan.
Do buydowns affect appraisal or underwriting on LA County loans?
- Appraisers focus on market value and comps, but large concessions are disclosed and can trigger added underwriting review; lenders also qualify you based on program rules.
Who benefits most from a temporary buydown in Pasadena?
- Buyers who need lower early payments or expect to refinance or see income growth within one to two years often benefit most from a temporary buydown.
