Temporary buydowns: how a 2-1 or 1-0 buydown works, and who pays

How does a temporary buydown work?

A temporary buydown lowers the interest rate you pay for the first one to three years of a mortgage, using money set aside at closing. After that, you pay the loan's full rate, called the note rate, for the rest of the loan.

The note rate is the one on your loan paperwork. The common versions are named for how many percentage points come off each year:

With a 2-1 buydown, year one is 2 percentage points below the note rate, year two is 1 point below, and from year three on you pay the note rate.

With a 1-0 buydown, year one is 1 point below the note rate, and from year two on you pay the note rate.

You'll occasionally see a 3-2-1, which runs the same pattern over three years.

Here's where the money comes from. At closing, a lump sum goes into an account set aside for your loan. Each month you pay the lower amount, and the account covers the rest of the full payment. When the account is used up, at the end of the buydown period, your payment steps up to the full amount.

Who pays for a temporary buydown?

The seller, a builder, the lender or the buyer can pay for a temporary buydown. Today it's most often the seller. Instead of cutting the price, the seller agrees to a credit at closing, and the credit pays for the buydown. Our guide to seller credits covers how to ask for one.

Builders offer buydowns a lot on new homes, usually when you use the lender they work with. Some loans come with a lender credit that can fund one. And you can pay for it yourself, though with your own money it's worth comparing other options first (more on that below).

Every loan program caps how much a seller or builder can put toward your costs. The cap depends on the loan type and your down payment, and the buydown counts against it.

How much does a temporary buydown cost?

A temporary buydown costs about the same as the total payment savings it delivers. The account has to hold enough to cover every month of reduced payments. So the cost of a buydown is roughly the total of what it saves you. To estimate it, add up the monthly difference for each month of the buydown.

If the seller is covering that cost, the lower payments cost you nothing. If you're covering it, you're mostly prepaying your own interest.

Does a buydown help you qualify for a bigger loan?

Usually not.

With most loans the lender checks whether you can afford the full payment at the note rate, not the lower year-one payment. A buydown won't stretch your budget for a bigger house. It just makes the first year or two easier.

That rule works in your favor, because the payment is going to rise. Before you sign, look at the full payment and decide whether you'd be fine paying it today, without counting on a raise or a refinance.

When is a temporary buydown worth it?

The best case is a seller or builder paying for it. A seller credit spent on a buydown usually lowers your first-year payment far more than the same money taken off the price would.

It also helps when you know your budget is about to loosen: a spouse going back to work, a raise already on the calendar, or a car loan with six payments left.

It helps less when you're paying for it yourself and plan to stay in the loan for years. That money might do more as points or as a bigger down payment.

And be careful if the plan is "rates will drop and I'll refinance before the full payment kicks in." Rates might not drop. Refinancing costs money and you have to qualify again (when refinancing makes sense). Plan as though the full payment is the one you'll keep.

What happens if you sell or refinance early?

If you sell or refinance before the buydown ends, there may be money left in the account. In most cases it goes toward paying down your loan balance instead of coming back to you as cash. Your buydown agreement says exactly what happens, so read that page before closing.

Is a buydown the best use of a seller credit?

It depends on how long you'll keep the loan.

A buydown is one of four common ways to spend a seller credit. A temporary buydown lowers the payment for the first one to three years. Discount points lower the rate for the whole loan, and our guide to points vs a temporary buydown puts the two side by side.

The credit can also pay closing costs, so you bring less cash to closing. Or it can come off the price, which lowers the loan amount and trims the payment a little for the life of the loan.

The right choice comes down to how long you'll keep the loan, how much cash you have, and how tight the first year looks. If you have an accepted offer and a seller credit on the table, ask your Mortgage Advisor to show your payment each way before you decide.

Quick answers

What is a 2-1 buydown?

A 2-1 buydown lowers your rate by 2 percentage points in the first year and 1 point in the second year. From year three on, you pay the full rate.

What is a 1-0 buydown?

A 1-0 buydown lowers your rate by 1 percentage point for the first year only. From year two on, you pay the full rate.

Is a temporary buydown the same as buying points?

No. Points lower your rate for the whole loan. A temporary buydown lowers it only for the first one to three years.

Can I get a temporary buydown on a refinance?

They're mostly used on home purchases, and many loan types don't allow one on a cash-out refinance. Ask your Mortgage Advisor what your loan allows.