2-1 Buydown: How It Works, What It Costs, and Who Pays for It

In a market where sellers are offering concessions, a 2-1 buydown is one of the most useful things to ask for. It doesn't change the price or your loan amount. It makes the first two years of payments noticeably smaller, and somebody else usually pays for it.

A 2-1 buydown is a temporary buydown. Your mortgage has a fixed note rate for its full term, but for the first 24 months your payment is calculated as if the rate were lower: two percentage points lower in year one, one point lower in year two. From month 25 onward, you pay the normal amount for the life of the loan. The difference between the full payment and the reduced payment is paid from an escrow account funded at closing, so the lender receives its full payment every month.

Take a $400,000, 30-year fixed loan at an illustrative note rate of 7% — an example, not a quote. The full principal and interest payment is about $2,661.

• Year one, calculated at 5%: about $2,147 a month, saving $514 a month, or roughly $6,167 for the year.
• Year two, calculated at 6%: about $2,398 a month, saving $263 a month, or roughly $3,156 for the year.
• Year three onward: the full $2,661.
• Total cost of the buydown: about $9,323, deposited at closing.

That $9,323 is the price. It's a dollar-for-dollar prepayment of interest, not a discount — the money buys exactly the savings it produces.

Almost always the seller or the builder, negotiated as part of the purchase. Builders use buydowns heavily because they move inventory without cutting the advertised price. A seller credit used for a buydown counts toward the program's interested-party contribution limit. On conventional loans for a primary residence, that limit is 3% of the price with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down; it's 2% on investment properties. FHA and VA have their own limits. Lenders sometimes fund buydowns as a promotion, and buyers can pay for their own, though if it's your money, permanent points or a larger down payment are often a better use of it.

This is the most common misunderstanding. On most programs, you qualify at the full note rate, not the year-one rate. The lender needs to know you can afford the payment in year three, so a buydown doesn't raise the price you can afford. What it does is give you breathing room while you furnish the house, pay moving costs, or wait for a raise or a business's revenue to grow into the payment.

• 1-0 buydown: one point lower for year one only. Cheapest, about a third of the cost of a 2-1 on the same loan.
• 2-1 buydown: two points then one point. The most common structure and the best balance of cost and relief.
• 3-2-1 buydown: three years of reductions, at roughly double the cost of a 2-1. See how a 3-2-1 buydown works.

Discount points buy a lower rate for the life of the loan. A temporary buydown front-loads the savings into two years. If you expect to keep the loan a long time, points usually win. If you expect rates to fall and plan to refinance, the buydown often wins, because you collect most of the savings before you'd refinance. In many cases any unused buydown funds are applied to your loan balance if you refinance or sell early, rather than being lost — read your buydown agreement to confirm. For a broader look at where rates sit on alternative-documentation loans, see Non-QM mortgage rates.

Availability varies. Some Non-QM programs — including bank statement loans for self-employed borrowers — allow seller-paid temporary buydowns; others don't, and some allow them on purchases of a primary residence only. Qualification at the note rate is standard. If you're self-employed and buying from a builder offering incentives, ask early whether the buydown can be applied to your loan type, because it changes which lenders are worth comparing through the self-employed program.

If you're negotiating with a seller, send me the price and the credit you're discussing. I'll show you what a 2-1 buydown would do to your first two years of payments next to the same money used for a rate buydown or closing costs. Program rules and concession limits vary and change over time.