Get Expert Financing
- Matched with investor-friendly lenders
- Fast pre-approvals-no W2s required
- Financing options fro rentals, BRRRR, STRs
- Scale your portfolio with confidence
When you’re borrowing $2 million for a home, every fraction of a percentage point in interest can have a major impact on your monthly payment. Two popular strategies for managing large loan payments are rate buy-downs and interest-only loans. But how do they stack up against each other?
This article will break down the differences, pros and cons, and help you decide which approach is best to lower your monthly mortgage payments.
What Is a Rate Buy-Down?
A rate buy-down is a financing arrangement where the borrower pays an upfront fee (points) to get a lower interest rate for part or all of the loan term.
Example for a $2M Loan:
- Loan: $2,000,000
- Standard interest rate: 7%
- Buy-down to: 6% with 2 discount points (2% of loan amount = $40,000)
- Monthly payment savings: ~$1,300/month (principal & interest)
Pro Tip: Rate buy-downs are often used in high-rate environments to help buyers qualify for financing or lower payments early in the loan.
Pros of Rate Buy-Downs:
- Immediate and long-term savings on monthly payments
- Fixed rate stability if applied for the full term
- May increase loan approval chances by lowering DTI
Cons of Rate Buy-Downs:
- High upfront cost
- Breakeven point might be several years down the line
- Not ideal for short-term ownership
What Is an Interest-Only Loan?
With an interest-only mortgage, borrowers pay only the interest for a fixed period (usually 5–10 years). After that, the loan converts to full amortization.
Example for a $2M Loan:
- Interest rate: 7%
- Interest-only period: 10 years
- Monthly payment (interest-only): ~$11,667
- Monthly payment after IO period: ~$17,752 (for remaining 20 years)
Pro Tip: Interest-only loans are often used by investors or high-income borrowers expecting rising income or short-term property ownership.
Pros of Interest-Only Loans:
- Lower initial monthly payments
- Increased cash flow flexibility
- Potential investment leverage
Cons of Interest-Only Loans:
- No equity build during IO period
- Higher payments later
- Risk of payment shock when full amortization kicks in
Side-by-Side Comparison
| Feature | Rate Buy-Down | Interest-Only Loan |
| Upfront Cost | High (discount points) | Low |
| Initial Monthly Payment | Lower than standard | Significantly lower |
| Long-Term Savings | High | Lower or none |
| Equity Build | Yes | No (during IO period) |
| Risk of Payment Shock | No | Yes (after IO period) |
| Best For | Long-term homeowners | Short-term ownership or cash flow management |
Which Option Is Best for Your $2M Loan?
- Choose a rate buy-down if you’re planning to stay in the home for at least 5–7 years and want payment stability.
- Opt for interest-only if you have irregular income, short-term plans, or are investing and need maximum cash flow flexibility.
Want help deciding? Schedule a free mortgage strategy call with one of our home loan experts.
Frequently Asked Questions
Is a rate buy-down tax-deductible?
Yes, in many cases the cost of buying down the rate (points) is tax-deductible, especially for primary residences. Consult a tax advisor.
Can I combine a rate buy-down with an interest-only loan?
Yes, some lenders offer interest-only loans with rate buy-down options, though this can be rare and may come with additional costs.
How long should I plan to stay in the home to make a rate buy-down worth it?
Typically, you need to stay in the home 3–5 years or more to recoup the upfront cost through monthly savings.
Ready to explore loan options for your $2 million purchase? Get a personalized loan estimate now.
Wondering how much you can save? Use our mortgage calculator to run the numbers.
Read Next
- Jumbo Loans vs. Conventional Loans: Making the Right Choice
- How to Find the Right Mortgage for Me: Jumbo Loan vs. Conventional Loan
Get Expert Financing
- Matched with investor-friendly lenders
- Fast pre-approvals-no W2s required
- Financing options fro rentals, BRRRR, STRs
- Scale your portfolio with confidence
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
