Key takeaways
- A 2-1 buydown lowers your mortgage payments for the first two years, but your actual mortgage interest rate stays the same.
- The seller or builder typically pays for the buydown, although there are limits on how much they can contribute.
- You’ll generally need to qualify for the mortgage based on the full payment, not the temporarily reduced amount.
- A price reduction generally saves more money overall when comparing equal amounts, while a buydown gives you more breathing room during your first two years.
How a 2-1 buydown works
A 2-1 buydown temporarily lowers the principal and interest portion of your mortgage payment for two years. Your payment is calculated as if your interest rate were 2 percentage points lower in the first year and 1 percentage point lower in the second. Starting in year three, you make the full payment.
Your actual mortgage interest rate, called the note rate, doesn’t change. Instead, money is set aside at closing, usually by the seller or builder, to cover the difference between your reduced payment and the full amount due.
Here’s how your payments change:
| Period | Your principal and interest payment is calculated using | Difference funded by |
| Months 1–12 | Note rate minus 2 percentage points | Buydown account |
| Months 13–24 | Note rate minus 1 percentage point | Buydown account |
| Month 25 onward | Full note rate | Buydown ends; you pay the full amount |
Your payment increases twice: once at the start of year two and again at the start of year three.
Keep in mind that the buydown only reduces your principal and interest payment. Property taxes, homeowners insurance and mortgage insurance aren’t reduced. And if you have a fixed-rate mortgage, your actual interest rate stays the same throughout.
Under Fannie Mae’s rules, your mortgage documents must reflect the permanent loan terms, not the temporarily reduced payments.
How much does a 2-1 buydown cost, and who pays?
TThe cost of a 2-1 buydown is the total amount needed to cover your reduced payments over the first 24 months. About two-thirds of that money is used in year one, when your payments are lowest.
To find out how much a buydown would cost for your mortgage, ask your lender for your full monthly principal and interest payment, your first-year payment and your second-year payment.
Then calculate:
- Year one: (Full payment − first-year payment) × 12.
- Year two: (Full payment − second-year payment) × 12.
- Total: Add the two amounts together.
Sellers and builders often cover this cost as an incentive to help you buy the home. However, mortgage programs limit how much they can contribute toward your financing costs.
Here’s how those limits generally work:
- Conventional loans (Fannie Mae): The limit is typically 3%, 6% or 9% of the lower of the purchase price or appraised value, depending on your down payment and how you’ll use the home. Fannie Mae guidelines.
- FHA loans: Sellers can generally contribute up to 6% of the sales price, including the cost of a temporary buydown. HUD guidelines.
- VA loans: Seller- or builder-funded buydowns count toward the 4% seller-concession limit, based on the home’s reasonable value. VA guidelines.
Because the buydown uses part of that allowance, the seller may have less money available to help with your other closing costs.
That’s why it’s worth comparing a buydown with other ways to use seller credits.
Is a 2-1 buydown worth it?
The easiest way to decide whether a buydown is worth it is to look at what else you could do with that money.
Ask how much the buydown costs, then compare what the same seller contribution could do as a price reduction, closing-cost credit or discount points.
Versus a price reduction
Let’s assume the seller is willing to reduce the home’s price by the same amount the buydown would cost, and you bring the same cash to closing. With the price reduction, that money comes directly off your loan balance. You borrow less from day one and pay less interest over time.
Under those assumptions, the price reduction saves you more money overall, regardless of when you pay off the mortgage.
The advantage of a buydown is timing. Instead of spreading smaller savings across the life of your loan, you get much lower payments during the first two years. That can be especially helpful if you’re trying to keep your monthly expenses manageable right after buying a home.
Versus a closing-cost credit
A closing-cost credit reduces the amount of money you need to bring to closing, rather than lowering your monthly payment. That means you can keep more of your savings available for emergencies, repairs or other expenses.
There are limits, though. Under Fannie Mae guidelines, seller credits that exceed your eligible closing costs are treated as sales concessions when calculating your loan terms. They don’t automatically reduce the price in your purchase contract.
Versus discount points
Discount points let you pay an upfront cost to secure a lower mortgage interest rate.
Unlike a temporary buydown, discount points lower your actual rate. On a fixed-rate mortgage, that lower rate stays in place for the life of your loan.
To compare the options, ask your lender for written quotes. You can estimate how long it takes for discount points to pay for themselves by dividing their upfront cost by your monthly savings.
Don’t rely on APR alone when comparing temporary buydowns. APR includes your interest rate and certain loan costs, but it doesn’t always account for temporary payment reductions.
Under Regulation Z, a third-party buydown arranged outside your mortgage contract isn’t reflected in the disclosed APR or payment schedule.
Ask your lender for a separate schedule showing what you’ll actually pay during the buydown period, alongside your Loan Estimate.
What if you refinance or sell early?
If you refinance or sell before the buydown ends, there may still be money left in the account. What happens to that money depends on your loan program and the terms of your buydown agreement.
Under Fannie Mae guidelines, unused funds may go toward paying off your mortgage or be returned to you or the funding lender, depending on the agreement. For VA loans, the remaining money must go toward the outstanding loan balance.
Before accepting a buydown, ask your lender what happens to any unused funds if you decide to refinance or sell.
How Tomo Mortgage’s First Year Buydown differs
Tomo Mortgage offers a slightly different option called the First Year Buydown. It’s a 1-0 buydown rather than a 2-1, which means your payments are reduced for one year instead of two.
Here’s how it works: Tomo Mortgage sets aside money at closing to cover the difference between your regular payment and a payment calculated as if your interest rate were 1 percentage point lower. For the first 12 months, you make the reduced payment. Starting in month 13, you pay the full amount based on your original mortgage rate.
You’ll still need to qualify for the loan using that full payment.
| Seller-funded 2-1 | Tomo Mortgage-funded 1-0 | |
| Reduced payments | 24 months | 12 months |
| Payment calculation | 2 points lower, then 1 | 1 point lower in year one |
| Who provides funds | Seller or builder | Tomo Mortgage |
| Seller credit allowance | Uses applicable allowance | Seller credits remain available; confirm for your loan |
Tomo Mortgage covers the cost of its First Year Buydown, rather than requiring a contribution from you or the seller. Ask your Loan Advisor about eligibility, terms and how the program affects any seller credits.
What to check before accepting a 2-1 buydown
Before you agree to a buydown, make sure you’ve covered these five things:
- Get the cost in writing. Ask for the total cost and a schedule showing your payments for each year.
- Compare your options. Find out what the same money could do as a price reduction, closing-cost credit or discount points.
- Plan for the full payment. Make sure you can comfortably afford your mortgage after the buydown ends.
- Understand what happens if you refinance or sell. Check what your agreement says about leftover funds.
- Review your loan documents. Compare your Loan Estimates, interest rates, APRs and the separate buydown terms. Learn what to check on a Loan Estimate.
A 2-1 buydown can lower your initial payments, but the full mortgage payment is what matters long term.
Tomo Mortgage · NMLS #2059741 · Equal Housing Lender
Frequently asked questions
Is a 2-1 buydown a good idea?
A 2-1 buydown can be a good option if you can comfortably afford the full mortgage payment but want lower payments during your first two years. That extra breathing room can help with moving costs, repairs or other expenses. Before deciding, compare the buydown with what the same money could do as a price reduction or closing-cost credit.
How much does a 2-1 buydown cost?
The cost depends on your loan amount and mortgage rate. It’s calculated by adding up the difference between your full monthly principal and interest payment and your reduced payments over the first 24 months. Roughly two-thirds of the cost goes toward year one. Your lender can provide the exact amount, including how much the seller or another party would need to contribute.
How do you negotiate a 2-1 buydown?
Start by asking the seller or builder to cover the buydown as part of your purchase agreement. You can also ask whether they’d offer the same amount as a price reduction or closing-cost credit instead. Your lender can help you compare the options and confirm that the contribution falls within your loan program’s seller concession limits.
Is a 3-2-1 buydown worth it?
A 3-2-1 buydown lowers your payments for three years instead of two. Your payment is calculated using a rate 3 percentage points below your note rate in year one, 2 points below in year two and 1 point below in year three. It provides longer relief but costs more to fund.
Do you qualify at the lower rate with a 2-1 buydown?
Generally, no. Under Fannie Mae, Freddie Mac and VA rules, lenders evaluate your application using the full note-rate payment, not the temporarily reduced payment. That means a 2-1 buydown generally won’t help you qualify for a larger loan. You’ll still need to show you can afford the payment you’ll make once the buydown ends.
Is a 2-1 buydown an adjustable-rate mortgage?
No. A 2-1 buydown is a temporary payment arrangement, not a type of adjustable-rate mortgage. With a fixed-rate loan, your actual mortgage interest rate stays the same throughout the loan. Money from the buydown account simply covers part of your payment for the first two years. After that, you make the full payment yourself.