What Is a 2-1 Buydown and How Does It Work?
A mortgage buydown is a financing strategy that temporarily or permanently lowers the interest rate used to calculate your monthly payment.
A 2-1 buydown is a type of temporary buydown that reduces the interest rate during the first two years of a new loan. It can help some homebuyers make mortgages more affordable in the short term, but it isn’t necessarily the right choice if you plan to stay in your home long term. Learn how a 2-1 buydown works, who pays for it and whether it’s the right choice for your situation.
- A 2-1 buydown temporarily lowers the interest rate during the first two years of your mortgage term.
- Home sellers, builders and lenders may cover the cost of a 2-1 buydown to incentivize buyers or homebuyers can opt to pay for a mortgage buydown themselves.
- A 2-1 buydown affects your short-term cash flow but not your mortgage qualification or long-term rate.
What is a mortgage buydown?
A mortgage buydown uses funds paid upfront to temporarily or permanently reduce your interest rate and mortgage payment. Depending on the terms, buydown funds can come from the buyer, seller, builder or lender.
A 2-1 buydown is a temporary mortgage buydown that lowers your interest rate during the first two years of the loan before it returns to the full note rate (the interest rate stated in your mortgage agreement). It’s a common financing option that can help make homeownership more affordable at the outset. Here’s how a 2-1 buydown typically works:
- Year 1: 2 percentage points below the note rate
- Year 2: 1 percentage point below the note rate
- Year 3 and beyond: Full note rate
A 2-1 buydown isn’t the same as paying discount points. Discount points, also called mortgage points, permanently reduce your interest rate for the life of the loan, while a 2-1 buydown lowers your monthly payments temporarily, using funds held in an escrow account to cover the payment difference.
How does a 2-1 buydown work?
When you move forward with a 2-1 buydown, the upfront lump sum is deposited into a separate escrow account. You’ll pay a reduced monthly principal-and-interest payment during the first two years of your loan, while your mortgage lender or loan servicer still receives the full scheduled monthly payment based on the loan’s note rate.
The funds in the escrow account cover the difference between the full payment and the reduced amount each month. When the mortgage buydown period ends, you begin making the full principal-and-interest payment for the rest of the loan term.
A 2-1 buydown temporarily lowers your monthly payment, but it doesn’t change your loan’s long-term interest rate.
2-1 buydown example: Payment by year
Let’s say you buy a $400,000 home with a 20% down payment and a 7% interest rate on a 30-year fixed-rate mortgage. Here’s how a 2-1 buydown would affect the monthly principal-and-interest payment on your $320,000 mortgage:
| Year | Interest rate used to calculate your payment | Your payment | Full payment | Who pays the difference? |
|---|---|---|---|---|
| 1 | 5% | $1,718 | $2,129 | You make the lower payment. Funds from the buydown account cover the difference. |
| 2 | 6% | $1,919 | $2,129 | You make the lower payment. Funds from the buydown account cover the difference. |
| 3 to 30 | 7% | $2,129 | $2,129 | You make the full payment. |
Keep in mind: The principal-and-interest portion of your payment will be established at closing, but your total monthly mortgage payment can still change if your property taxes, homeowners insurance, mortgage insurance or HOA dues increase.
How much does a 2-1 buydown cost?
The cost of a 2-1 buydown depends on your loan amount, interest rate, loan term and lender pricing. In general, the upfront cost equals the total payment subsidy needed to cover the reduced payments during the buydown period.
2-1 buydown cost = Year-one payment difference + Year-two payment difference
Using the example above, your monthly principal-and-interest payment at the 7% note rate is about $2,129. During the first year, you pay about $1,718, creating a monthly subsidy of roughly $411, or about $4,932 over 12 months. In the second year, your payment increases to about $1,919, leaving a monthly subsidy of about $210, or roughly $2,520 over the year. Together, the estimated cost of the 2-1 buydown is about $7,452.
Who pays for a 2-1 buydown?
Any of the parties involved in the transaction can opt to pay for a 2-1 buydown; however, it’s most common for sellers and builders to offer this as a concession to attract buyers. This is especially common in a high-interest-rate environment or when sellers want to offer an incentive to buyers without lowering the home’s purchase price. Buyers can also fund the mortgage buydown themselves, and some lenders may offer credits that can be applied toward the buydown cost.
If you’re paying for a 2-1 buydown yourself, compare that option with other ways to use your money, such as making a larger down payment, reducing your closing costs or increasing your cash reserves. If a seller offers to pay for a 2-1 buydown, compare that concession with a purchase price reduction or a closing-cost credit to determine which option provides the greatest long-term value.
If a lender offers a credit toward a 2-1 buydown, consider the loan’s annual percentage rate (APR), lender fees and total borrowing costs — not just the lower initial payment.
Does a 2-1 buydown help you qualify for a mortgage?
No, a 2-1 buydown doesn’t usually help you qualify for a mortgage. Although it temporarily lowers your monthly mortgage payment, lenders consider whether to approve borrowers based on the full payment at the loan’s note rate rather than the temporarily reduced payment. That’s because lenders want to know you can afford the mortgage after the temporary subsidy ends.
A 2-1 buydown can still improve your short-term cash flow during the early years of the home loan, but it typically doesn’t increase your borrowing power or improve your chances of mortgage approval.
Pros and cons of a 2-1 buydown
Pros
- Lower monthly payments during the first two years. The temporary rate reduction can make homeownership more affordable while you adjust to a new mortgage.
- Improves short-term cash flow. The payment savings can help if you expect your income to grow or have other large expenses shortly after buying a home.
- Seller-paid buydowns reduce your upfront costs. You receive the benefit of lower payments without paying the upfront subsidy yourself.
- Payment increases are predictable. Because the note rate is set at closing, you’ll know exactly when and by how much your principal-and-interest payment will increase.
Cons
- Higher payments over time. Your principal-and-interest payment increases in year two and again in year three when the mortgage buydown ends.
- The payment reduction is only temporary. A 2-1 buydown doesn’t lower your note rate; when the buydown period ends, you’ll pay the full monthly payment.
- A buyer-paid buydown ties up cash. If you’re paying for the buydown yourself, that money might be better used in a different way.
- It usually won’t help you qualify for a larger loan. Most lenders use the full payment at the note rate when considering whether to approve you for a mortgage.
When does a 2-1 buydown make sense?
A 2-1 buydown helps to reduce the cost of homeownership in the early years, and it may be a good fit if:
- You expect your income to increase soon. A 2-1 buydown can provide temporary payment relief if you’re starting a new job with scheduled raises or expect another reliable increase in household income before the full payment begins.
- A seller or builder is paying for the buydown. A seller-paid mortgage buydown can provide lower initial payments without requiring you to spend your own cash.
- You can comfortably afford the full payment later. A 2-1 buydown works best when the lower payments provide short-term flexibility, but you are prepared for the full mortgage payment once the temporary subsidy ends.
Your decision to choose a 2-1 buydown should not be based on the assumption that you’ll refinance before payments increase. While rates could fall in the future, there is no guarantee you’ll qualify for a refinance or that market conditions will make refinancing worthwhile.
When should you avoid a 2-1 buydown?
You may want to reconsider a 2-1 buydown if:
- You can’t afford the full payment after the buydown ends. The temporary savings can make the first two years of homeownership more manageable, but you’ll eventually need to make the full principal-and-interest payment based on your loan’s long-term rate.
- You’re paying for the mortgage buydown yourself. Using thousands of dollars to lower payments temporarily may not be the best use of your money if you need the cash elsewhere.
- A lower purchase price would provide more long-term value. If a seller is offering concessions, a price cut would reduce your loan amount and monthly payment for the entire loan term, while a buydown only provides temporary savings.
- You’re counting on refinancing before the payment increases. Mortgage rates may not fall enough to make refinancing beneficial, and you’ll still need to qualify based on your financial situation at that time.
2-1 buydown vs. other mortgage options
Depending on your goals, you may want to compare a 2-1 buydown with other strategies to lower your mortgage payments.
2-1 buydown vs. permanent buydown
Unlike a 2-1 buydown, which reduces mortgage payments only for two years, a permanent buydown lowers your interest rate — and payment — for the life of the loan. If you pay mortgage points, or upfront fees charged at closing, you can lower the interest rate for the life of the loan — or as long as you have the mortgage. One point generally costs 1% of the loan amount, but the exact rate reduction varies by lender, loan type and market conditions.
For example, you might pay 1 point on a mortgage to reduce your interest rate from 7% to 6.75%. The lower rate applies for as long as you keep that mortgage.
2-1 buydown vs. 3-2-1 buydown
A 3-2-1 buydown works similarly to a 2-1 buydown, but it provides a larger temporary payment reduction over three years instead of two. The payment is based on an interest rate that is 3 percentage points below the note rate in year one, 2 percentage points lower in year two and 1 percentage point lower in year three. After that, the payment returns to the full note rate.
Because the subsidy lasts longer and provides greater payment reductions, a 3-2-1 buydown typically costs more than a 2-1 buydown.
2-1 buydown vs. ARM
An adjustable-rate mortgage (ARM) may offer a lower initial interest rate than some fixed-rate loans, but that rate can adjust after the initial fixed period based on market conditions — and could increase significantly in a rising rate environment.
A 2-1 buydown, by contrast, uses a fixed-rate mortgage with a temporary payment subsidy. Once the buydown period ends, the borrower’s payment is based on the original fixed note rate and does not adjust.
What happens if you refinance before the buydown ends?
You may be able to refinance a mortgage with a 2-1 buydown before the temporary payment reduction period ends, as long as you meet the lender’s refinance requirements. However, refinancing could affect any remaining funds in the buydown account.
The handling of unused buydown funds depends on your loan terms, lender requirements and the specific mortgage buydown agreement. Before closing on a 2-1 buydown, ask your lender if it’s possible to refinance the loan and what would happen to any remaining buydown funds if you refinance, sell the home or pay off the mortgage early.
Frequently asked questions
No. A 2-1 buydown temporarily lowers your mortgage payment using funds deposited at closing. Discount points are upfront fees that permanently reduce your interest rate.
Yes. A first-time homebuyer may be able to use a 2-1 buydown if it’s allowed under their loan program and they meet their lender’s requirements. It can make the early years of homeownership more affordable, but buyers should still make sure they can afford the full payment once the buydown period ends.
A 2-1 buydown can be worthwhile if a seller or builder pays the cost and you can comfortably afford the full payment beyond the buydown period. It may be less attractive if you must pay the upfront cost yourself or are counting on refinancing before payments increase.
With a 2-1 buydown, your payment is calculated using an interest rate 2 percentage points below your note rate in the first year and 1 percentage point below your note rate in the second year. Other temporary mortgage buydowns may offer different reductions, up to 3 percentage points, depending on the loan program and terms.
A seller may offer a mortgage buydown to make their property more attractive to buyers without reducing the listing price. By helping lower a buyer’s initial mortgage payments, a seller can provide an incentive that may help the home stand out in a competitive market. Builders sometimes use this strategy to fill new construction homes.
View mortgage loan offers from up to 5 lenders in minutes