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A 2-1 buydown can lower your mortgage rate for the first two years—making homeownership more affordable when rates are high. Here’s how it works, who pays for it, and when it truly saves you money.
What Is a 2-1 Buydown?
A 2-1 buydown is a type of temporary mortgage rate reduction. It lets you pay a lower interest rate for the first two years of your loan, before it resets to your full rate in year three and beyond.
Here’s what the numbers mean:
- “2” = your rate is 2% lower in the first year.
- “1” = your rate is 1% lower in the second year.
- After that, your rate returns to the original note rate for the remaining term.
Example:
Suppose your lender approves you for a 30-year fixed mortgage at 7%.
- Year 1: You pay 5%.
- Year 2: You pay 6%.
- Years 3–30: You pay 7%.
The difference in interest for the first two years is prepaid (often by the seller, builder, or lender) and held in an escrow account to cover the shortfall in your monthly payments.
Who Typically Pays for a Buydown?
- Home sellers may offer a 2-1 buydown as an incentive to attract buyers.
- Builders often use it to make new-construction homes more affordable without dropping the sale price.
- Lenders occasionally offer buydowns as promotional financing options.
- Buyers can also choose to fund a buydown themselves at closing—though that’s less common unless they’re certain about refinancing soon.
Key takeaway: The funds don’t disappear; they’re pre-paid interest that temporarily subsidizes your monthly payments.
How Much Does a 2-1 Buydown Cost?
The cost depends on your loan size and interest rate. On average, a 2-1 buydown costs roughly 2–3% of the loan amount in upfront fees.
For example:
- Loan amount: $400,000
- Estimated buydown cost: ~$8,000–$12,000
That’s roughly equivalent to paying 2–3 “points” in closing costs. But unlike permanent points (which lower your rate for the full term), a temporary buydown expires after two years.
2-1 Buydown vs. Permanent Buydown (Discount Points)
| Feature | 2-1 Buydown | Permanent Buydown |
|---|---|---|
| Rate reduction | 2% first year, 1% second | Fixed reduction for full loan |
| Duration | 2 years | 30 years (or life of loan) |
| Upfront cost | Paid at closing | Paid at closing |
| Best for | Buyers expecting to refinance or increase income | Buyers staying long-term |
| Who pays | Seller, builder, lender, or buyer | Usually buyer |
When a 2-1 Buydown Actually Saves You Money
A 2-1 buydown can save you money if:
- You plan to refinance within 1–3 years.
You enjoy lower payments now and never reach the higher rate before refinancing. - You expect your income to rise soon.
Perfect for buyers early in their careers or expecting dual incomes later. - The seller or builder covers the cost.
If you’re not paying out of pocket, it’s essentially free savings. - You want to ease into homeownership.
It provides breathing room for furniture, repairs, or moving expenses early on.
When It Might Not Be Worth It
- You’re planning to stay long-term and won’t refinance.
- You pay the buydown cost yourself and won’t recover it in savings.
- Rates continue to rise, making future refinancing harder.
- You’re tight on closing funds and need cash for other expenses.
In those cases, a permanent rate buydown or smaller loan amount might make more sense.
Example Savings Breakdown
Let’s compare a $400,000 loan at 7% fixed vs. a 2-1 buydown:
| Year | Interest Rate | Monthly Payment | Monthly Savings | Annual Savings |
|---|---|---|---|---|
| 1 | 5% | $2,147 | $505 | $6,060 |
| 2 | 6% | $2,398 | $254 | $3,048 |
| 3–30 | 7% | $2,652 | — | — |
Total savings over 2 years: ~$9,100 in lower payments.
If the seller covers the buydown cost, that’s real money in your pocket.
Pro Tip: Combine With Seller Concessions
You can sometimes negotiate a 2-1 buydown as part of your offer—especially in slower markets where sellers are willing to make concessions instead of lowering the price.
For instance, a $10,000 buydown costs the seller less than a $15,000 price cut, but it saves the buyer more upfront. Everybody wins.
Bottom Line
A 2-1 buydown can be a smart strategy when:
- Rates are high,
- You expect to refinance within a few years, and
- Someone else (the seller or builder) pays the upfront cost.
But if you’re paying for it yourself and staying in the home long-term, you might be better off putting that money toward permanent points or a bigger down payment.