Quick answer: A 2/1 buydown temporarily lowers your interest rate by 2 percentage points in year 1 and 1 point in year 2, then the rate returns to the note rate for the rest of the loan. On a $300,000, 30-year loan at 6%, it lowers payments by about $366 a month in year 1 and $188 in year 2, and costs roughly $6,655 funded upfront by the seller, builder, lender or buyer.
A 2/1 buydown can make the first two years of a mortgage more affordable. It is a useful tool when rates are high, but it only works if you plan for the payment increase in year three.
What Is a 2/1 Buydown?
A 2/1 buydown is a financing option that temporarily lowers your interest rate for the first two years, then returns to the original fixed rate (the “note rate”) for the rest of the loan.
- Year 1: The rate is 2 percentage points below the note rate.
- Year 2: The rate is 1 percentage point below the note rate.
- Year 3 and beyond: The full note rate applies for the remaining loan term.
How Does a 2/1 Buydown Work?
The cost of the lower rate is paid upfront as prepaid interest, usually placed in an escrow account. Each month those funds make up the difference between your reduced payment and the full payment. Under Fannie Mae guidelines, you are qualified at the full note rate, not the temporary lower rate, and buydowns are allowed on principal residences and second homes but not investment properties.
Who Pays for a 2/1 Buydown?
- The seller: Sellers may pay for a buydown to make a home more attractive, especially when rates are high.
- The builder: Builders of new construction often offer buydowns as an incentive.
- The lender: Some lenders offer a buydown as part of a program, sometimes in exchange for a higher rate or fees.
- The buyer: Buyers with extra cash can pay for the buydown themselves.
Buydown funds paid by a seller or builder count toward the limit on seller concessions for your loan type. See our guide to seller concessions for those limits.
2/1 Buydown Example: $300,000 Loan at 6%
| Interest rate | Monthly principal and interest | Savings vs. full rate | |
| Year 1 | 4% | $1,432 | $366 per month |
| Year 2 | 5% | $1,610 | $188 per month |
| Year 3 and beyond | 6% (note rate) | $1,799 | none |
Year 1 savings are about $4,397 and year 2 savings are about $2,258, so this buydown would cost roughly $6,655 to fund. The seller, builder, lender or buyer pays that amount upfront.
Next step: Want to see the payments on your own loan? A loan officer will show you the year-by-year schedule.
No obligation. Rates, terms and availability depend on your credit and property. You will answer a few quick questions about your home purchase so we can offer you the best options. It only takes a few minutes.
Who Benefits From a 2/1 Buydown?
- First-time homebuyers who want lower payments while they adjust to the costs of owning a home.
- Buyers expecting income growth who plan for higher payments later.
- Sellers and builders who want to make a home more attractive without cutting the price.
2/1 Buydown Pros and Cons
Pros
- Lower payments in the first two years.
- Can help a buyer manage cash flow during a tight stretch.
- If rates drop, you may be able to refinance before the full rate begins.
Cons
- Payments rise after two years, which can be a strain if you have not planned for it.
- Someone has to fund the upfront cost, which can affect price negotiations.
- Refinancing is not guaranteed, so do not count on lower rates later.
What Happens to Buydown Funds If You Refinance Early?
If you refinance before the buydown period ends, remaining buydown funds held in escrow are typically applied to your loan payoff. In some cases they may reduce your principal balance or go toward closing costs. The exact handling depends on your buydown agreement and lender policies, so confirm with your lender before you refinance.
Is a 2/1 Buydown Right for You?
A 2/1 buydown is a good fit if you want lower payments now and can comfortably afford the full payment in year three. Ask your lender to show you the full payment schedule before you decide.
Frequently Asked Questions
How much does a 2/1 buydown cost?
The cost equals the total payment savings over the first two years. On a $300,000, 30-year loan at 6%, that is about $6,655.
Does the seller have to pay for a 2/1 buydown?
No. Sellers, builders, lenders or buyers can pay. Seller and builder contributions generally count toward the concession limits for your loan type.
Can I refinance during a 2/1 buydown?
Yes, but remaining buydown funds are typically applied to your payoff, so check your agreement and costs before you refinance.
Next step: A buydown only makes sense if you are comfortable with the year-three payment. We will show you the full schedule and whether a seller credit could cover the cost.
No obligation. You will answer a few quick questions about your home purchase so we can offer you the best options. It only takes a few minutes.
Sources
- Fannie Mae Selling Guide, B2-1.4-04 Temporary Interest Rate Buydowns
- Fannie Mae Selling Guide, B3-4.1-02 Interested Party Contributions
Method: Payments and interest figures are calculated with the standard fixed-rate amortization formula. They exclude taxes, insurance, mortgage insurance and closing costs, and are examples, not offers.
Tithe Lending LLC | NMLS #2439006 | Equal Housing Lender. General information only; not a loan offer or financial, tax or legal advice.