What Is 2-1 Buydown?
A 2-1 buydown temporarily lowers a borrower's interest rate by 2 percentage points in year one and 1 percentage point in year two, before returning to the full note rate for the rest of the loan term.
2-1 Buydown in plain English
A 2-1 buydown lowers your mortgage payment for the first two years. In year one the payment is calculated at 2 percentage points below the note rate, in year two at 1 point below, and from year three at the full note rate.
Someone - often a builder or seller - pays the difference upfront into an account that tops up your payments. The loan's actual rate never changes.
Worked example
Temporary 2-1 buydown versus one discount point
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $400,000 at a 7.00% note rate, 30 years
- Permanent option
- 1 point lowers the rate 0.25 percentage point (lender pricing varies)
| Step | Calculation | Result |
|---|---|---|
| 1. Payment at the note rate | $400,000 at 7.00% | $2,661.21 |
| 2. Year 1 payment (5.00%) | $400,000 at 5.00% | $2,147.29 |
| 3. Year 2 payment (6.00%) | $400,000 at 6.00% | $2,398.20 |
| 4. Cost of the 2-1 buydown (the subsidy) | ($513.92 + $263.01) × 12 | $9,323 |
| 5. One point instead: cost and savings | $4,000 for $66.82 a month | break-even in 60 months |
2-1 buydown cost: $9,323. A 2-1 buydown costs about $9,323 and saves money only in the first two years. One point costs $4,000 and saves about $67 a month for as long as you keep the loan.
What this calculation leaves out
- Lenders qualify you at the full note rate, not the bought-down rate.
- Rate-per-point pricing is set by each lender daily; 0.25 point per point is a ballpark, not a quote.
- If the loan is refinanced during the buydown period, how unused subsidy is handled depends on the buydown agreement.
Try it: 2-1 Buydown with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
Builder incentives compared: the same dollars, five ways
A builder's incentive can cut the price, pay closing costs, buy down the rate or fund upgrades. Each changes cash to close, the payment and the long-term cost differently.
- Lowest 5-year cost
- Price reduction
- $573,772
- Least cash at closing
- Closing-cost credit
- $44,500
- Lowest first-year payment
- Temporary 2-1 buydown
- $2,150 a month
| Option | Cash to close | Payment year 1 | Payment year 3 | 5-year cost | Unused |
|---|---|---|---|---|---|
| Price reduction | $55,000 | $2,575 | $2,575 | $573,772 | — |
| Closing-cost credit | $44,500 | $2,665 | $2,665 | $581,369 | $3,000 |
| Temporary 2-1 buydown | $50,835 | $2,150 | $2,665 | $578,369 | — |
| Permanent buydown (points) | $56,500 | $2,418 | $2,418 | $574,532 | — |
| Upgrade allowance | $56,500 | $2,665 | $2,665 | $593,369 | — |
- Price reduction: Lowers the loan, the payment and usually the property tax for as long as you own the home. Not an interested-party contribution, so no concession limit applies.
- Closing-cost credit (financing concession): Lowers cash to close dollar for dollar, up to your actual closing costs and prepaids. Cannot fund the down payment; any excess is usually lost.
- Temporary 2-1 buydown (financing concession): The buydown costs $9,335; the rest of the incentive goes to closing costs. You qualify at the full note rate, and the payment rises in years 2 and 3.
- Permanent buydown (points) (financing concession): About 3.75 points, lowering the rate to roughly 6.064% (lender pricing varies). Saves every month for the life of the loan - unless you refinance or sell early.
- Upgrade allowance: Worth the full amount only if you would have bought those upgrades anyway. Upgrades may add less resale value than they cost; the appraisal must still support the price.
Eligibility: you qualify at the full note rate with a temporary buydown; credits cannot fund the down payment.
Formula
5-year cost = Cash to close + Σ payments (months 1–60) + Balance after 60 monthsAssumptions
- Concession limit at this LTV: 6% of the price ($26,700), Fannie Mae Selling Guide B3-4.1-02, principal residence.
- 30-year fixed loan; taxes, insurance and mortgage insurance left out.
- Point pricing varies by lender; get the builder's lender quote in writing and compare it with an outside lender.
- Upgrades are counted at zero cash value: they help only if you wanted them.
Why it matters
Buydowns are often paid for by the seller or builder as a concession, easing a buyer into full payments — but the borrower must be able to afford the full note-rate payment once the buydown period ends.
A 2-1 buydown helps cash flow early on but does not lower the long-term cost of the loan. Fannie Mae requires borrowers to qualify at the full note rate, so it does not increase how much you can borrow.
What it means for you
Who pays?
The party named in the buydown agreement - commonly a builder or seller.
What buyers should know
Make sure you can afford the full note-rate payment from year three.
Common mistakes
- Budgeting from the year-one payment instead of the full note-rate payment.
- Comparing a buydown offer with a price cut without counting how long you will keep the loan.
- Assuming you can refinance before year three if rates fall.
Compare and common questions
2-1 Buydown: frequently asked questions
Who pays for a 2-1 buydown?
Usually the seller or builder as a concession, sometimes the lender or the buyer. Seller- and builder-paid buydowns count toward the loan program's contribution limit.
What happens to a 2-1 buydown if I refinance?
The buydown ends with the loan. Any unused subsidy is handled under the buydown agreement, often applied to reduce the balance.
Is a 2-1 buydown better than a permanent buydown?
Not if you keep the loan for many years. A temporary buydown saves money only in years one and two; a permanent buydown lowers every payment.
Go deeper
More Financing Terms
Recommended next step
Compare a 2-1 buydown with a permanent buydown and a price cut.
Mortgage buydown calculator →Sources and review
- Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns, Fannie Mae. Supports: Temporary buydown requirements, including qualifying at the note rate.
- Selling Guide B3-4.1-02, Interested Party Contributions (IPCs), Fannie Mae. Supports: Seller- or builder-funded buydowns are interested party contributions subject to limits.
Where this applies: United States. Federal disclosure and servicing rules (TILA/Regulation Z, RESPA/Regulation X) apply nationwide; loan-program rules come from Fannie Mae, Freddie Mac, FHA, VA, USDA or the lender.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Compare the builder's offer on the numbers
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