The basics
What is a 2-1 buydown?
A 2-1 buydown is a temporary discount on your monthly mortgage payment. It lasts for the first two years of the loan.
The name tells you how it works. In year one, your payment is figured as if your rate were 2 percentage points lower. In year two, 1 point lower. From year three on, you pay the full amount.
Most important
Your rate doesn’t actually change
Your note rate is the interest rate written into your loan. On a fixed-rate mortgage, it stays the same for the life of the loan.
A buydown doesn’t touch that rate. It only lowers the payment you make for the first 24 months.
Think of it as a two-year discount on your payment, not a lower rate. In year three, your payment goes up to the full note-rate amount and stays there.
The numbers
What does that look like?
Say you buy a $750,000 home with 20% down. That’s a $600,000, 30-year fixed loan at a hypothetical 7% note rate.
Monthly principal & interest
| Year | Payment | You save |
|---|---|---|
| Year 1figured at 5% | $3,220.93 | $770.88 |
| Year 2figured at 6% | $3,597.30 | $394.51 |
| Year 3 on7% note rate | $3,991.81 | – |
Assumptions: 7% is a hypothetical rate for illustration, not a rate offer. Payments are principal and interest only; property taxes, insurance and HOA dues are extra.
Who pays
Who pays for the buydown?
Your lender still gets the full note-rate payment every month. So the discount has to be paid for upfront.
At closing, money goes into a buydown account (also called a subsidy account). Each month for two years, the lender draws from it to cover the gap between what you pay and the full payment.
That money often comes from a seller credit: money the seller agrees to put toward your costs as part of the deal. Sometimes a builder or lender pays instead. A seller doesn’t have to agree, so it’s something you negotiate in your offer.
Seller money has limits. Every loan program caps how much a seller can contribute. On a conventional loan with 20% down, the cap is generally 6% of the price. FHA and VA set their own limits.
The cost
How much does it cost?
The cost is simply the total of your payment savings over the two years.
Same example
That’s about 2.3% of the loan amount. The 6% conventional cap on this $750,000 price is $45,000, so the buydown fits with room left over for closing costs. Your lender calculates the exact amount.
To see the cost with your own price and down payment, use my buydown seller credit calculator.
Watch out for
What’s the catch?
- You qualify at the full payment. Lenders generally approve you based on the note-rate payment ($3,991.81 here), not the lower year-one payment. A buydown makes the early years easier. It doesn’t increase how much you can borrow.
- Your payment goes up twice. Once in month 13 and again in month 25. You need to be comfortable with the full payment from day one.
- Not every loan allows it. Buydowns are usually set up on home purchases with a fixed-rate loan on a primary or second home. Fannie Mae doesn’t allow them on investment properties or cash-out refinances. Jumbo and Non-QM lenders set their own rules, and not every lender offers them.
- The seller credit can only be spent once. Money used for the buydown isn’t available for your closing costs.
My take
Is it worth considering?
It can be, especially when a seller is willing to give a credit and you’re already comfortable with the full payment. It tends to fit best when your first two years are the tightest: moving costs, furniture, a new baby, or income you expect to grow.
Some buyers choose a buydown hoping rates fall and they can refinance. That might happen, but nobody can promise it. Choose a buydown only if the full payment works for you today.
Other ways to use the same seller credit
- A 3-2-1 or 1-0 buydown. Same idea, different shape. A 3-2-1 starts 3 points lower and costs more. A 1-0 lowers year one only and costs less.
- Discount points. Lower your note rate for the life of the loan. The monthly savings are smaller, but they never end. Often better if you plan to keep the loan a long time.
- A closing cost credit or price reduction. Better if cash to close is your tight spot. Compare all three in my seller credit vs. buydown guide.
First, I make sure you qualify for and feel comfortable with the full note-rate payment, because that’s the payment you’ll have from year three on. Then I price the same seller credit three ways: a 2-1 buydown, permanent points and closing cost help. If the first two years matter most, the 2-1 usually wins. If you’ll keep the loan a long time, points often do.
Derek VailMortgage Broker · NMLS #1233953Common questions
What happens to the buydown money if I sell or refinance early?
The buydown agreement says what happens to unused funds. Under Fannie Mae’s rules, they’re generally applied to your loan payoff or refunded to you.
Can the seller credit go toward my down payment instead?
No. Seller contributions can pay for closing costs, prepaid items and buydowns, but not your down payment.
Should I get pre-approved with or without the buydown?
Get pre-approved at the full note rate. That way the buydown is a bonus you negotiate, not something your approval depends on. When you make an offer, ask your agent to request the seller credit as a specific dollar amount.
Your next step
Run your own numbers
Pick the question you want answered. Each calculator needs only your price and down payment, and uses my published rates. If you’d like me to run it with you, text me.