A 2-1 mortgage buydown is a temporary way to reduce your mortgage payments for the first two years of your loan. In the first year, your payment is calculated as if the interest rate were 2 percentage points lower than your actual note rate. In the second year, it’s 1 point lower. Starting in year three, your payment increases to the full note rate.
According to OriginPoint Financial, this type of structure is designed to help homebuyers ease into their mortgage payments, giving them more flexibility during the first few years of homeownership.
Behind the scenes, a lump-sum subsidy is placed in a buydown account at closing. Each month during the buydown period, a portion of that subsidy is applied toward your payment so you can enjoy a lower monthly cost early on. These funds can be provided by the lender, the seller, or even a builder credit, depending on the structure of your purchase. The Fannie Mae Selling Guide explains that such temporary buydowns are allowed on fixed-rate loans as long as the interest rate reduction doesn’t exceed 3% and the annual increase doesn’t exceed 1%.
How the 2-1 Buydown Works
Here’s an example of how a 2-1 buydown affects your monthly payments. These figures cover principal and interest only, not taxes, insurance, or HOA dues.
Example A: $400,000 Loan, 30-Year Term, 7.000% Note Rate
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Year 1 (5.000%): $2,147.29
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Year 2 (6.000%): $2,398.20
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Years 3–30 (7.000%): $2,661.21
That means you’d save roughly $6,167 in year one and $3,156 in year two—about $9,323 total—funded by the buydown subsidy.
Example B: $600,000 Loan, 30-Year Term, 7.000% Note Rate
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Year 1 (5.000%): $3,220.93
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Year 2 (6.000%): $3,597.30
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Years 3–30 (7.000%): $3,991.81
The total payment reduction here is about $13,985 over the first two years.
Mortgage experts at The Mortgage Reports note that the total cost of a temporary buydown typically equals the borrower’s payment savings during the discounted period.
Pros of a 2-1 Buydown
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Lower initial payments: The first two years of reduced payments can free up funds for moving expenses, renovations, or other priorities.
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Predictable increases: You know exactly how much your payments will rise in year two and when they’ll reach the full amount in year three.
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Can be seller- or lender-funded: Many buyers use seller credits or builder incentives to pay for the buydown, rather than their own cash.
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Transparent costs: The buydown cost equals the total amount saved on payments during the temporary period.
Cons of a 2-1 Buydown
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You must qualify at the full rate: Even though your initial payments are lower, lenders will approve you based on the 7% rate (in our example), not the discounted one.
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Payments rise after year two: Be ready for the higher monthly cost in year three and beyond.
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Limited availability: Not all loan types or property situations qualify, and rate reductions are capped at 3%.
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Funds are not refundable in most cases: Unless you refinance before the buydown period ends, those funds are simply used up as intended.
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Best suited for short-term borrowers: A 2-1 buydown typically makes the most sense if you plan to refinance before year three. According to Mortgage Mark, unused buydown funds can often be applied toward your principal balance when you refinance, which means you’re not “losing” that subsidy.
When a 2-1 Buydown May Be Right for You
A temporary buydown could be a good fit if:
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You expect your income to grow within the next two years.
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You’re receiving seller or lender credits that can fund the buydown instead of coming out of your pocket.
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You want short-term payment relief but prefer a fixed-rate loan over an adjustable-rate option.
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You plan to refinance or sell before year three, taking advantage of the initial payment relief while avoiding the higher full-rate payments later on.
If you think interest rates might drop in the next couple of years, this structure can be particularly useful. You’ll enjoy reduced payments early and, if rates fall, can refinance before your payment increases.
Important Details to Know
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The note rate never changes. Your mortgage documents will show the full rate and payment amount; the buydown is recorded separately.
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Disclosures matter: The Consumer Financial Protection Bureau (CFPB) requires that temporary buydowns be properly reflected in your loan disclosures.
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Unused funds upon refinancing: If you refinance before the two-year buydown period ends, the remaining subsidy balance is typically applied as a principal reduction, lowering your loan balance.
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Contribution limits apply: Programs like those governed by Fannie Mae’s guidelines restrict how much sellers or lenders can contribute toward the buydown.
The Bottom Line
A 2-1 buydown is not a permanent rate discount—it’s a temporary payment relief tool. It can be a smart move for buyers who want short-term affordability and expect to refinance before year three, or whose income will rise over time.
If you’d like to explore whether this strategy fits your situation, or want to see side-by-side numbers for your specific purchase, reach out today.
Contact Camille at [email protected] or call 773-377-9200 with any questions about how a 2-1 buydown might work for you.
