Mortgage Education
How Does a 2-1 Mortgage Buydown Work?
A 2-1 mortgage buydown uses funds set aside at closing to temporarily reduce the buyer’s monthly mortgage payment. The payment is calculated using a rate 2 percentage points below the note rate in year one and 1 percentage point below in year two. Beginning in year three, the buyer pays the full note-rate payment. The mortgage note rate itself does not change.
See How the Payments Change
Hypothetical Example
- Purchase price
- $500,000
- Down payment
- $100,000 (20%)
- Loan amount
- $400,000
- Loan term
- 30-year fixed
- Note rate
- 7.50%
| Period | Payment Basis | Monthly P&I |
|---|---|---|
| Year 1 | Payment calculated at 5.50% | $2,271.16 |
| Year 2 | Payment calculated at 6.50% | $2,528.27 |
| Years 3–30 | Full 7.50% note-rate payment | $2,796.86 |
Approximate upfront buydown subsidy: $9,531.46. Minor differences may occur due to rounding.
What Buyers and Agents Should Know
- The buyer must qualify at the full note rate.
- The payment increases as the temporary subsidy steps down.
- The subsidy is funded upfront; it does not forgive part of the loan balance.
- Review the full payment, available cash, and ongoing ownership costs before deciding.
- A future refinance or lower interest rate is not guaranteed.
Who May Pay for a Temporary Buydown?
Depending on the loan program and lender guidelines, funding may come from an eligible seller contribution, builder contribution, agent credit, or lender-funded option. Available structures and contribution limits vary. Ask for a loan-specific review before negotiating a credit.
Questions to Ask Before Making an Offer
- What will my total monthly payment be during each year?
- Can I comfortably afford the full payment after the subsidy ends?
- How much does the buydown cost, and who will fund it?
- How does this compare with a price reduction or other permitted uses of a seller credit?
- What happens to unused subsidy funds if I sell or refinance?
Frequently Asked Questions
Does a temporary buydown change my mortgage interest rate?
No. The note rate stays the same. Funds set aside at closing cover part of the scheduled payment during the temporary buydown period.
Do I qualify using the lower first-year payment?
No. The buyer must qualify at the full note rate, subject to the applicable loan guidelines.
Is a temporary buydown the same as paying discount points?
No. A temporary buydown subsidizes payments for a limited period. Discount points may reduce the mortgage note rate under the terms of the loan.
What happens after the first two years?
With a 2-1 buydown, the subsidy ends and the buyer pays the full scheduled principal-and-interest payment beginning in year three. Taxes, insurance, and other ownership costs may also change.
Does a seller-funded buydown count toward seller contribution limits?
Generally, yes. Seller-funded buydown costs must fit within the applicable program’s contribution limits along with other covered seller-paid costs. Have the complete credit reviewed before finalizing the contract.
What happens if I refinance or sell early?
Treatment of unused funds depends on the buydown agreement and applicable loan rules. Review that agreement before assuming the funds will be refunded or applied in a particular way.
Have a Buyer or Listing in Mind?
Let’s compare the numbers and see whether a temporary buydown could fit your transaction.
Let’s Compare Your OptionsAbout the Author
NMLS #680403
Mpire Financial | NMLS #2108504
Office: 865-352-8222
Mobile: 518-894-0517
Equal Housing Opportunity
For educational purposes only. Not a commitment to lend. Loan availability, eligibility, funding sources, and contribution limits vary by program and lender and are subject to borrower approval. A future refinance or lower interest rate is not guaranteed.
This website provides general information about consumer and business-purpose mortgage financing. Some programs may be available only for investment or non-owner-occupied properties, while others may have personal occupancy requirements. Program availability, licensing, terms, documentation, and eligibility vary by lender, borrower, property type, occupancy, and state.
All mortgage financing is subject to credit review, income or asset verification when required, appraisal, title, insurance, lender guidelines, and final approval.
Lisa Stepp-Seritt, NMLS #680403
Mpire Financial, NMLS #2108504
Equal Housing Opportunity