Rising interest rates have many borrowers seeking ways to manage their cash flow and improve loan terms. One option lenders sometimes offer is a rate buydown, which involves paying up front to secure a lower interest rate. It can be a helpful tool, but only in the right circumstances.
What a Rate Buydown Is
A rate buydown allows a borrower to reduce the interest rate on a commercial real estate loan by paying an additional fee at closing. The cost is usually expressed in “points,” with one point equal to one percent of the loan amount. For example, on a $10 million loan, one point equals $100,000. A lender may reduce the interest rate by 20–30 basis points for each point paid, although the exact tradeoff depends on market conditions.
Momentum starts to build
The first quarter of 2025 included high-profile transactions by major players, suggesting growing appetite for deals. But momentum cooled in Q2 as concerns around interest rates and policy clarity resurfaced. Despite that, sentiment remains broadly positive heading into the second half of the year.
Permanent buydowns remain in effect for the life of the loan. Temporary buydowns, which are more common in residential mortgages, offer a lower rate for the first one to three years before resetting to a higher rate. In commercial real estate, permanent buydowns are the more typical structure.
When It Can Be Done
Not every lender offers buydowns, and those that do may limit them to certain products. They are most often seen in permanent loans, such as agency multifamily or life company debt, where the term is long enough for the savings to matter. In bridge and construction loans, buydowns are less common but may be available if the lender needs to improve the debt service coverage ratio to make a deal work.
When It Should Be Done
The decision comes down to math and strategy. If a borrower expects to hold a property for a long time, the upfront payment can be offset by years of lower interest expense. A simple breakeven analysis shows whether the savings exceed the cost.
Example
Consider a borrower taking a $10 million loan with a 10-year fixed term, amortized over 25 years at an interest rate of 7.00%. The monthly payment is $70,677.92, with a remaining balance of $7,863,339.64 due at maturity.
If the borrower pays one point ($100,000) to reduce the rate to 6.75%, the monthly payment falls to $69,091.15, and the balance at maturity declines to $7,807,708.64. That creates:
- Cash flow savings: about $1,587 per month, or $19,041 per year.
- Breakeven on cash flow:2 years ($100,000 ÷ $19,041).
- Balloon benefit at year 10: $55,631 reduction in the maturity balance.
Over the full 10-year term, the total benefit is roughly $246,000 — well above the $100,000 upfront cost. If the property is refinanced or sold within two years, savings would only be about $38,000, falling short of breakeven.
Benefits of a Rate Buydown
- Lower monthly debt service can improve cash flow from the outset.
- Stronger debt service coverage, which may help a loan qualify in the first place.
- Predictability in loan payments over a longer term reduces interest rate risk.
Drawbacks of a Rate Buydown
- A significant upfront cost, often hundreds of thousands of dollars.
- Risk of losing the investment if the property is sold or refinanced before breakeven.
- Capital that could be used for reserves, tenant improvements, or leasing commissions is instead tied up in the loan.
Where It’s More Prevalent
Rate buydowns are most common in stabilized, cash-flowing assets where the borrower intends to hold long-term. Multifamily properties with agency financing, office buildings with long leases in place, and industrial properties with credit tenants are typical candidates. They are less common in speculative development, transitional assets, or short-term bridge loans where refinancing or disposition is expected within a few years.
Conclusion
Rate buydowns are not a one-size-fits-all solution. They can reduce interest costs and strengthen loan metrics, but only when the hold period and capital strategy align with the upfront expense. For some borrowers, they are a smart way to improve long-term cash flow. For others, preserving capital for operations or improvements will deliver greater value. Careful analysis of both the math and the business plan is essential before deciding whether to buy down a rate.