Buydown

A temporary buydown is a financing arrangement where someone (usually the seller or builder) pays an upfront fee to reduce your mortgage interest rate for the first one to three years of the loan — it’s like getting training wheels for your mortgage payment.

How Buydowns Work

The most common structures are 2-1 and 3-2-1 buydowns. In a 2-1 buydown, your rate is 2% below the note rate in year one, 1% below in year two, and full rate from year three onward. A 3-2-1 buydown adds a third discounted year. The upfront cost equals the total interest savings, paid into an escrow account at closing.

This money has to come from somewhere — typically the seller, builder, or a lender credit. Borrowers can also fund it themselves, but that’s less common.

Dollar Example

Your note rate is 7.00% on a $350,000 loan. With a 2-1 buydown, you pay 5.00% in year one ($1,878/month) and 6.00% in year two ($2,098/month). Year three and beyond: full 7.00% ($2,329/month). The buydown costs about $9,200 upfront. If the seller covers it, you get two years of lower payments without paying extra.

Watch Out

You qualify based on the full note rate, not the buydown rate. So you need to afford $2,329/month to get the loan — the lower payments are a bonus, not a qualification tool. Some buyers think buydowns let them stretch into a bigger loan. They don’t.

If rates drop during the buydown period, refinancing makes sense since you’ll be refinancing from the full note rate. The remaining buydown funds in escrow are typically refunded or credited. Run your specific scenario through our mortgage calculator to see the payment trajectory.

Frequently Asked Questions

Is a buydown better than a lower purchase price?

It depends on the numbers. A $10,000 price reduction on a $350,000 loan saves about $24/month over 30 years. A $10,000 buydown saves $450/month in year one and $200/month in year two. For short-term cash flow, the buydown wins. For total cost, the price reduction is better. Compare both scenarios before deciding.