Key Takeaways:
- A temporary buydown lowers your share of the mortgage payment for the first one to three years. Money set aside at closing covers the difference; on a fixed-rate loan, your actual interest rate doesn’t change.
- Once the subsidy ends, you pay the full amount. Lenders qualify you using that full payment, so don’t assume you’ll refinance before it rises.
- Common structures include 1-0, 1-1, 2-1, and 3-2-1. Conventional loans generally permit reductions of up to 3 percentage points for up to three years.
- Sellers, builders, or lenders can fund a buydown. Seller-funded buydowns count toward program limits on seller contributions.
- Tomo Mortgage offers a lender-funded First Year Buydown. Tomo Mortgage covers the subsidy, so buyers don’t have to use seller credits to fund it.
- A buydown helps most upfront; a price cut reduces your loan balance and payments for the long term. Compare both before deciding.
How does a temporary buydown work?
A temporary buydown lowers your mortgage payment for a set period, usually the first one to three years. Money is set aside at closing to cover the difference between your reduced payment and the full amount. Each month, your loan servicer draws from that money, and your payment gradually increases according to the schedule in your buydown agreement.
Fannie Mae requires the account to be funded before it purchases the loan, with the money held separately from the lender’s own funds. Your mortgage documents still reflect the full payment. If the subsidy becomes unavailable, you’re responsible for that amount.
Types of temporary buydowns
The name tells you how much the payment rate is reduced each year. With a 2-1 buydown, you pay as if your rate were 2 percentage points lower in year one and 1 point lower in year two. The full payment begins in year three.
Fannie Mae and Freddie Mac generally allow conventional buydowns lasting up to three years, with an initial reduction of no more than 3 points and annual increases of no more than 1 point. FHA and VA have their own rules.
| Structure | Year 1 | Year 2 | Year 3 | Full payment starts |
| 1-0 | 1 point lower | Full rate | Full rate | Year 2 |
| 1-1 | 1 point lower | 1 point lower | Full rate | Year 3 |
| 2-1 | 2 points lower | 1 point lower | Full rate | Year 3 |
| 3-2-1 | 3 points lower | 2 points lower | 1 point lower | Year 4 |
The reductions describe the rate used to calculate your share of principal and interest, not a change to the fixed interest rate in your mortgage note. Taxes, insurance, and mortgage insurance aren’t reduced.
Every structure eventually reaches the same full principal-and-interest payment on a fixed-rate loan. The actual savings and total subsidy cost depend on your loan amount, interest rate, and buydown terms.
Who pays for a temporary buydown, and what limits apply?
Sellers, builders, and lenders commonly pay. Depending on the program, borrowers or employers may also contribute. Your lender may allow fewer options than the agency rules.
Seller and builder concessions
For conventional loans, Fannie Mae counts the full seller- or builder-funded buydown against the permitted contributions:
| Loan-to-value ratio (primary or second home) | Maximum interested-party contribution |
| Over 90% | 3% |
| 75.01% to 90% | 6% |
| 75% or less | 9% |
Loan-to-value (LTV) is the share of the home’s value you’re borrowing. The limits apply to the lower of the purchase price or appraised value, and contributions can’t exceed eligible costs.
FHA generally caps interested-party contributions at 6% of the sales price. On VA loans, seller-funded buydowns count toward the 4% concession limit based on reasonable value; ordinary closing-cost credits are treated differently.
For buyers making smaller down payments, these limits matter. An expensive temporary buydown could use most or all of the seller contribution you’re allowed, leaving less available for closing costs. See how seller credits work before negotiating.
How Tomo Mortgage handles temporary buydowns
Tomo Mortgage offers a First Year Buydown, a lender-funded temporary buydown that lowers your principal-and-interest payment for the first 12 months.
During that first year, your payment is calculated as though your interest rate were 1 percentage point lower. Tomo Mortgage funds the difference at closing, rather than requiring you or the seller to pay for the subsidy. That means seller credits can still go toward other closing costs, instead of being used to fund the buydown.
Starting in month 13, you make the full payment based on your locked interest rate. You’re qualified using that full payment from the beginning, so there shouldn’t be any surprise about the scheduled increase.
Ask your Tomo Mortgage loan advisor whether the First Year Buydown is available for your loan and how it compares with other options.
Lender-paid buydowns and pricing
A lender-paid buydown isn’t necessarily the same as a lower-cost mortgage overall. Depending on the loan program and offer, pricing may differ from a loan without the buydown.
Ask for comparable quotes on the same day, with and without a buydown. Check the note rate, annual percentage rate (APR), and cash due at closing—not just the initial payment.
APR includes certain borrowing costs, but doesn’t tell the whole story about temporary subsidies. The goal is to understand both your short-term payment relief and your long-term borrowing costs.
Agency rules vs. lender requirements
Lenders can apply stricter requirements, called overlays. They may limit the structures offered, eligible funding sources, or borrower qualifications.
Ask what your lender actually allows before writing a buydown into an offer.
What happens when the buydown ends?
Your principal-and-interest payment rises to the full amount in your loan documents. On a fixed-rate mortgage, that payment stays the same afterward unless you refinance or pay off the loan. Property taxes and insurance may change separately.
Fannie Mae and Freddie Mac qualify borrowers at the full note rate rather than the reduced payment. Plan your own budget around that figure, too. Don’t rely on refinancing before the buydown ends. Future rates and eligibility are uncertain.
For Freddie Mac loans, the servicer must notify borrowers before each scheduled payment change.
If you sell or refinance early, unused funds are handled under your agreement and program rules. Fannie Mae may allow a payoff credit or a return to the borrower or funding lender. On VA loans, remaining funds go toward the outstanding debt at payoff.
Should I get a buydown, price cut, or closing-cost credit?
A temporary buydown gives you the most payment relief at the beginning. A price cut creates smaller monthly savings that last, and reduces what you owe. A closing-cost credit means less cash needed upfront.
Here’s how the options compare:
| Use of seller funds | Effect on mortgage payments | How long it lasts |
| Temporary buydown | Larger payment reduction upfront | During the buydown period |
| Price reduction | Smaller, ongoing payment reduction | As long as you keep the loan |
| Closing-cost credit | No change to principal and interest | Reduces cash at closing |
| Discount points (permanent buydown) | Depends on lender pricing | Life of a fixed-rate loan |
When does a price cut become the better deal?
A temporary buydown generally provides more immediate payment relief, while a price cut can deliver greater savings over time.
The longer you keep your mortgage, the more valuable those ongoing savings may become. A price cut also leaves you with a smaller loan balance from day one.
There’s no universal break-even point. It depends on your interest rate, loan amount, how much the seller contributes, and how long you keep the mortgage.
Discount points are another option. Unlike a temporary buydown, they lower the actual interest rate on your loan. How much each point lowers your rate varies by lender, and seller-paid points count toward conventional seller-contribution limits.
Whichever option you choose, make sure you can comfortably afford the full mortgage payment.
Before choosing, talk to your loan advisor about available buydown options, including Tomo Mortgage’s First Year Buydown.
Tomo Mortgage · NMLS #2059741 · Equal Housing Lender
Frequently Asked Questions
Does a temporary buydown change my mortgage’s interest rate?
On a fixed-rate mortgage, no. Money set aside at closing covers part of the payment temporarily; your note rate stays the same.
Does a temporary buydown increase how much I can borrow?
Generally not. Lenders qualify you using the full payment rather than the temporary subsidy.
What happens to unused money if I sell or refinance?
It depends on the loan program and your agreement. Fannie Mae permits certain payoff credits or returns; VA requires remaining funds to reduce the outstanding debt at payoff.
Is a temporary buydown the same as an adjustable-rate mortgage?
No. A buydown temporarily subsidizes payments; an adjustable-rate mortgage can change its actual interest rate. Certain conventional ARMs allow temporary buydowns, too.
Can FHA and VA loans have temporary buydowns?
Yes, on eligible fixed-rate loans, subject to each program’s rules and lender restrictions.
Can I use a temporary buydown when refinancing?
Sometimes. Fannie Mae and Freddie Mac may allow them on eligible refinances without cash out, but not cash-out refinances. FHA doesn’t permit them on refinances. VA allows temporary buydowns on eligible fixed-rate cash-out refinances and IRRRLs. A typical buydown is funded when a new mortgage closes, not added to an existing loan afterward.