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Temporary Rate Buydowns Explained

A temporary buydown lowers your mortgage payment for the first year or two using money placed in escrow at closing, usually by the seller or the builder. The note rate never changes.

How a 2-1 buydown actually works

You close on a normal fixed-rate mortgage at the market rate. Separately, a lump sum goes into an escrow account at closing. Each month during the buydown period, that account covers the difference between what you pay and what the loan actually requires.

With a 2-1 buydown, your payment is calculated at two percentage points below the note rate in year one, one point below in year two, and the full note rate from year three forward. A 3-2-1 extends the same idea across three years.

Who pays for it

The buydown is almost always a seller or builder concession, funded out of the seller's proceeds rather than your cash. In slower markets, sellers often prefer paying for a buydown over cutting the price, because it produces a bigger visible payment drop per dollar spent.

A buyer can pay for a buydown, but it rarely makes sense. If you are spending your own money to lower a rate, a permanent buydown through discount points usually gives you more for it.

The number that matters is the year-three payment

The risk in a temporary buydown is straightforward. Your payment steps up on a known schedule, and it lands at the full note rate. If you cannot comfortably afford that final payment, the buydown has only delayed the problem.

Lenders qualify you at the note rate rather than the discounted rate for exactly this reason. Run the calculator at the full note rate and treat the first two years as a temporary discount, not as your budget.

Temporary versus permanent buydown

Discount points permanently reduce the note rate for the life of the loan. A temporary buydown leaves the note rate alone and just subsidizes early payments. Same dollars, different shape.

Temporary buydowns fit buyers who expect income to rise, or who plan to refinance if rates fall. Permanent points fit buyers who will hold the loan long enough to pass the break-even point, which is usually somewhere around five to seven years.

One detail favors the temporary version. If you refinance or sell before the buydown period ends, the unused escrow balance is generally credited toward your payoff rather than lost.

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Frequently asked questions

What is a 2-1 buydown?

A temporary buydown where your payment is figured at two percentage points below the note rate in year one, one point below in year two, and the full rate afterward. Escrowed funds cover the difference.

Who pays for a temporary rate buydown?

Usually the seller or the builder as a closing concession. Buyers can pay, but permanent discount points are normally a better use of buyer cash.

Does a buydown change my interest rate?

No. The note rate on your loan stays the same for the full term. A temporary buydown only subsidizes the early payments from an escrow account.

What happens when the buydown expires?

Your payment rises to the full note rate on a schedule set at closing. Lenders qualify you at that full rate, so budget for it from day one.

What if I refinance before the buydown ends?

The unused portion of the buydown escrow is generally applied to your loan payoff rather than forfeited. Confirm the terms with your lender before closing.

Is a temporary buydown better than a lower price?

It depends on your horizon. A buydown gives a larger short-term payment cut per dollar, while a price reduction lowers your loan balance and payment permanently.