A permanent buydown is paying discount points upfront to obtain a lower permanent rate – for the life of the loan.
Let’s use the 6.5% example. For $1663 paid upfront at closing you could get a 6.125% rate or a payment $88/mo lower than the payment at 6.5%. For $8514 upfront you could obtain a permanent rate of 5.5% and your payment would be $231 a month lower. For about $15,573 upfront you could have a 4.99% rate with a payment $345 lower than the 6.5%. Of course, the rate being used here is only an example. Rates change daily and depend on a variety of factors such as loan-to-value, the credit score of the borrower, type of property, the list goes on and on.
The key is who pays for the buydown cost, if the buyer is paying then the big question you need to ask yourself is how long do you plan to own the home? If you pay $15,500 to buy your rate down and lower your payment by $345/mo it will take you 45 months to “break even.” So, if you plan to keep the house, say for 5 to 10 years, the permanent buydown makes sense. Read my article on “Naming Terms not Price.” Have the seller pay the cost if possible.
One of the big advantages of the permanent buydown is that when qualifying for the loan, the lender uses the permanent rate. This is unlike the temporary buydown where the borrower qualifies at a higher rate.