Lower payments, early years
Temporary Rate Buydowns
Your rate drops 2% in year one and 1% in year two. Someone else funds it. Here is exactly how it works, and the one thing that catches people out.
Put in the loan amount and the rate on your quote. You will see all three years’ payments and what the seller has to put up to fund it.
Principal and interest only. Taxes, insurance, mortgage insurance and any association dues are not included, so your real payment is higher. Illustration only, using the amount and rate you enter. Not an offer, a quote or a commitment to lend. Your actual rate, APR, fees and terms come from a lender’s disclosures. Seller-paid amounts must fit within the interested-party contribution limits for your loan type. Equal Housing Lender.
The seller wants their price. You want a payment that works. A temporary buydown is how those two things stop fighting.
Instead of cutting the price by $20,000, the seller puts a smaller amount into an account that lowers your payment for two years. The seller protects their comp. You get breathing room in the years you need it most.
What "2-1" actually means
| Year | Your rate |
|---|---|
| Year 1 | Note rate minus 2% |
| Year 2 | Note rate minus 1% |
| Year 3 onward | The full note rate |
So on a 6.5% note rate, you pay as though it were 4.5% in year one, 5.5% in year two, then 6.5% from year three.
The difference is not forgiven. It is paid out of a subsidy account funded at closing by whoever agreed to pay for it.
Shorter versions exist too. A 1-0 buydown cuts one percent for one year. Longer 3-2-1 structures exist on some programs.
Where the money comes from
The seller. The most common source. It is negotiated in your offer like any other concession, and it counts against the seller-concession limits for your loan type, so it is not unlimited.
The builder. Very common on new construction, where a builder would rather buy down your rate than cut the sticker price on a whole tract.
The lender. On some affordable loan programs, the lender funds the buydown. On those programs you can usually opt out and take a pricing credit instead, which is worth comparing rather than assuming.
You. Possible, but usually the wrong move. If you are paying, permanent points are normally the better deal.
What shows up on your paperwork
You will see the cost in section H of your Loan Estimate, labelled as a buydown subsidy, offset by credits in section J. There is a separate Temporary Buydown Disclosure in your package.
If someone tells you about a buydown and you cannot find it on the Loan Estimate, ask harder.
The catch that costs people houses
Your debt-to-income ratio is calculated on the full note rate.
Not the bought-down rate. The real one.
This means a buydown does not increase how much house you qualify for. It only improves your cash flow in years one and two. I have watched buyers write offers assuming otherwise and then fall out of escrow.
Say it back to yourself before you write the offer: the buydown helps my payment, not my approval.
Which loans allow it
| Loan type | 2-1 available | Notes |
|---|---|---|
| FHA | Yes | Purchase and rate-and-term |
| Conventional (Fannie) | Yes | Not on affordable-product refinances, or Texas home equity loans |
| Conventional (Freddie) | Yes | Purchase and rate-and-term |
| Jumbo | Yes | Purchase only |
Cash-out refinances are generally excluded.
When a buydown is the right call
You expect to refinance. If you believe rates come down in the next two years, a buydown carries you until they do, and you have not spent your own money on points you will abandon.
Your income is about to rise. New job with a step-up, a spouse returning to work, a business ramping. The buydown covers the gap.
The seller will not move on price. Especially on a listing that has been sitting. Many sellers will fund a buydown before they will drop the number that shows in the public record.
When it is not
You are stretching. If year three's payment frightens you, the buydown is hiding a problem rather than solving one. Year three always arrives.
You are staying forever and paying yourself. Permanent points beat a temporary buydown over a long hold.
It is being used to sell you a house you cannot afford. That is the honest warning. I will tell you if that is what is happening.
Stacking, and what blocks it
Buydowns and down payment assistance do not always combine. Some zero-down programs specifically prohibit buydowns. If you need both, we have to check the order of operations before you write an offer. Zero down home loans.
Let's price it on your actual offer
Questions people ask
Who pays for a 2-1 buydown?
Usually the seller, negotiated as a concession in your offer. A builder can pay for it, and on some affordable loan programs the lender pays for it. The money is set aside at closing in a subsidy account and used to cover the difference in your payment during the first two years.
Does a buydown help me qualify for a bigger loan?
No, and this is the most important thing on this page. Your debt-to-income ratio is calculated on the full note rate, not the reduced rate. The buydown improves your cash flow in the early years. It does not increase your buying power.
What happens if I sell or refinance during the buydown period?
Any unused subsidy money generally goes toward your loan payoff rather than being lost. Ask for the specific treatment in writing, because it is set by the loan documents.
Can I get a buydown on a refinance?
On most programs, purchase and rate-and-term refinance qualify. Cash-out refinances generally do not. Some affordable-product refinances are excluded as well.
Is a buydown better than just paying points?
They solve different problems. A buydown helps the first two years and then stops. Points lower the rate for the life of the loan. If you plan to stay a long time and you are paying, points usually win. If a seller is paying and you expect rates to fall, a buydown often wins because you keep the option to refinance.