Mortgage Buydown: How 2-1 and 3-2-1 Buydowns Work

When mortgage rates are high, buydowns offer a creative way to make monthly payments more affordable—at least for the first few years. Builders, sellers, and even buyers themselves are increasingly using buydowns to bridge the gap between today's rates and what homebuyers can actually afford.

This guide explains how mortgage buydowns work, the most common structures (2-1 and 3-2-1), who pays for them, and whether they're a smart move in 2026.

What Is a Mortgage Buydown?

A mortgage buydown is an arrangement where someone—typically the seller, builder, or buyer—pays an upfront fee to temporarily or permanently reduce the interest rate on a mortgage.

Two main types:

1. Temporary buydown - Rate is reduced for the first 1-3 years, then adjusts to the permanent rate
2. Permanent buydown - Rate is reduced for the entire life of the loan (same as buying [discount points](/blog/mortgage-points-explained))

Most buydowns today are temporary because they're more affordable and popular in high-rate environments.

How Temporary Buydowns Work

With a temporary buydown, funds are deposited into an account at closing. Each month, money from that account is used to subsidize your payment, effectively lowering your interest rate for a set period.

Key points:

• Your actual note rate (contract rate) never changes
• The subsidy makes your effective rate lower during the buydown period
• After the buydown period ends, you pay at the full note rate
• The subsidy account is yours—unused funds are refunded if you refinance or sell early

2-1 Buydown Explained

The 2-1 buydown is the most popular temporary buydown structure. Your rate is reduced by 2% in year one and 1% in year two, then returns to the permanent rate in year three.

Example: 2-1 Buydown

Loan details:

• Loan amount: $400,000
• Permanent rate: 7.00%
• 2-1 buydown structure

Payment schedule:

• Year 1: 5.00% rate → $2,147/month
• Year 2: 6.00% rate → $2,398/month
• Years 3-30: 7.00% rate → $2,661/month

Buydown cost: ~$11,200 paid upfront

How the Cost Is Calculated

The buydown fee covers the difference between what you pay and what the lender requires:

Year 1:

• Full payment at 7%: $2,661/month
• Your payment at 5%: $2,147/month
• Difference: $514/month × 12 = $6,168

Year 2:

• Full payment at 7%: $2,661/month
• Your payment at 6%: $2,398/month
• Difference: $263/month × 12 = $3,156

Total buydown cost: $6,168 + $3,156 = $9,324

(Actual cost may be slightly higher due to lender fees and rounding)

3-2-1 Buydown Explained

The 3-2-1 buydown extends the reduced-rate period to three years, with the rate stepping down gradually.

Example: 3-2-1 Buydown

Loan details:

• Loan amount: $400,000
• Permanent rate: 7.00%

Payment schedule:

• Year 1: 4.00% rate → $1,910/month
• Year 2: 5.00% rate → $2,147/month
• Year 3: 6.00% rate → $2,398/month
• Years 4-30: 7.00% rate → $2,661/month

Buydown cost: ~$18,000 paid upfront

The 3-2-1 costs more but provides an extra year of relief and a lower starting payment.

1-0 Buydown Explained

A simpler, cheaper option: reduce the rate by 1% for the first year only.

Example: 1-0 Buydown

Loan details:

• Loan amount: $400,000
• Permanent rate: 7.00%

Payment schedule:

• Year 1: 6.00% rate → $2,398/month
• Years 2-30: 7.00% rate → $2,661/month

Buydown cost: ~$3,200 paid upfront

Less dramatic savings but much more affordable.

Who Pays for the Buydown?

Seller-Paid Buydown (Most Common)

• Seller covers the buydown cost as a concession
• Popular in buyer's markets when homes aren't selling
• Effectively a price reduction without lowering the sale price (helps seller's comps)
• Negotiated as part of the purchase contract

Negotiation tip: "We'll pay asking price if you cover a 2-1 buydown"

Builder-Paid Buydown

• Home builders offer buydowns as incentives on new construction
• Very common in 2024-2026 when rates are elevated
• Often advertised: "4.99% rate for the first year!"
• Builder pays the buydown fee from their profit margin

Watch out for: Inflated home prices to cover the buydown cost

Buyer-Paid Buydown

• You pay the buydown cost at closing
• Makes sense if you expect income to increase
• Recent graduates, business owners ramping up
• Helps you qualify with lower initial payments

Lender-Paid Buydown (Rare)

• Lender covers cost in exchange for higher rate later or other fees
• Less common, usually has strings attached

When Buydowns Make Sense

Perfect Scenarios for Buydowns:

1. You expect income to increase

• Starting new job with guaranteed raises
• Finishing residency/training
• Business ramping up
• Lower payments now, can afford higher later

2. You plan to refinance soon

• Rates are high but expected to drop
• Buydown gets you affordable payments until you refi
• If you refinance in year 2, you may even get unused funds back

3. Seller needs to move inventory

• Buyer's market
• Home has been sitting
• Seller motivated—negotiate buydown instead of price drop

4. Builder incentive

• New construction with promotional buydown
• Helps you qualify
• No out-of-pocket cost to you

5. Tight qualification

• Your DTI is borderline
• Lower initial payment helps you qualify
• Income expected to grow

When Buydowns Don't Make Sense

Skip Buydowns If:

1. You're paying for it out of pocket and rates are expected to drop

• You might refinance before the buydown period ends
• Wasted money if you refi in year 1

2. Inflated home price

• Builder/seller raised price to cover buydown
• Better to negotiate lower price instead

3. You prefer payment stability

• Payment jumps can be jarring
• Fixed payment from day one is more predictable

4. Uncertain job/income

• Can you handle the payment increase?
• Don't bet on future raises that aren't guaranteed

5. Better uses for the money

• Larger down payment to [avoid PMI](/blog/mortgage-insurance-pmi-guide)
• Home improvements
• Emergency fund

Buydown vs. Discount Points: What's the Difference?

Temporary Buydown

• Reduces rate for 1-3 years only
• Payment increases over time
• Lower upfront cost
• Good if you expect to refinance or income to grow

Permanent Buydown (Discount Points)

• Reduces rate for life of loan
• Payment stays same for 30 years
• Higher upfront cost
• Good if you're keeping the loan long-term

Example comparison:

• $400,000 loan at 7.00%
• Temporary 2-1 buydown: ~$9,300 cost, saves ~$9,300 over 2 years
• 1 point permanent buydown: ~$4,000 cost, saves $67/month for 30 years ($24,120 total if you keep it)

If you're keeping the loan 5+ years, permanent buydown (points) usually wins. If uncertain or expecting to refinance soon, temporary buydown is safer.

How to Negotiate a Seller-Paid Buydown

Step 1: Know the Market

• Buyer's market? You have leverage
• How long has the home been listed?
• Are there competing offers?

Step 2: Structure Your Offer

Instead of: "We offer $480,000"

Try: "We offer $500,000 (asking price) with seller to cover a 2-1 buydown (~$9,300 seller credit)"

Why this works:

• Seller gets asking price (looks better for comps)
• You get affordable payments
• Same net effect as $490,700 sale price

Step 3: Show the Math

Calculate the buydown cost and include it in your offer:

• "We're requesting a seller credit of $9,300 to fund a 2-1 interest rate buydown"

Be specific—vague requests get rejected.

Step 4: Be Ready to Compromise

• Start with 3-2-1, settle for 2-1
• Or request partial credit toward buydown
• Negotiation is expected

Step 5: Get It in Writing

• Purchase contract should specify:
  • Amount of credit
  • Purpose: "for 2-1 interest rate buydown"
  • Paid at closing directly to lender/escrow

Tax and Legal Considerations

Tax Deductibility

• Buydown fees are generally NOT immediately deductible
• Treated similarly to points—amortized over loan life
• Consult tax professional for your situation

Seller Credit Limits

Lender caps on [seller concessions](/blog/seller-concessions-guide):

• Conventional (10% down): 3% max
• Conventional (25%+ down): 9% max
• FHA: 6% max
• VA: 4% max

Buydown must fit within these limits (usually does).

Qualification

• Lenders qualify you at the fully indexed rate (permanent rate), not the buydown rate
• You must prove you can afford the full payment
• DTI based on final payment, not year-1 payment

This is good—prevents you from overextending

Buydowns in Rising vs. Falling Rate Environments

When Rates Are High (2023-2026)

• Buydowns are very popular
• Get you into a home now with lower payments
• Plan to refinance when rates drop
• Builders/sellers use them as sales tools

When Rates Are Low (2020-2021)

• Buydowns are rare
• No need—rates already affordable
• Better to lock in low rate permanently

When Rates Are Falling

• Buydowns still make sense if:
  • You're buying now but expect to refi soon
  • Lower initial payment helps you qualify
• Risk: You refi early and forfeit part of buydown benefit

When Rates Are Rising

• Less common but still useful
• Locks in temporary relief
• Helps with qualification

Real-World Buydown Scenarios

Scenario 1: Medical Resident

Situation:

• Buying $350,000 home
• Current income: $65,000
• Income in 2 years: $250,000+ (attending physician)
• Tight DTI now, plenty of income later

Solution: 2-1 buydown

• Lower payments during residency
• Can easily afford jump when attending
• Perfect use case

Scenario 2: First-Time Buyer in Slow Market

Situation:

• Home listed 120 days
• Motivated seller
• Buyer at asking price

Solution: Negotiate seller-paid 2-1 buydown

• Seller gets asking price
• Buyer gets affordable payments
• Win-win

Scenario 3: Builder Incentive

Situation:

• New construction community
• Builder offering 3-2-1 buydown promo
• No price increase

Solution: Take it!

• Free money
• Refinance when rates drop if it makes sense
• No downside

Scenario 4: Buyer Paying for Buydown

Situation:

• $500,000 home
• Buyer wants lower initial payments
• Rates at 7%, expects drop to 5% in 2 years

Analysis:

• 2-1 buydown costs ~$11,600
• Saves ~$11,600 over 2 years
• Break-even IF they keep it 2 years
• Better move: Save the $11,600, wait for rates to drop, refinance

Verdict: Probably not worth it—too risky if rates don't drop as expected

Buydown [Alternatives](/blog/heloc-alternatives)

Rate-and-Term Refinance (Later)

• Wait for rates to drop
• Refinance to lower rate
• No upfront cost now
• Risk: Rates may not drop

ARM ([[[Adjustable Rate Mortgage](/blog/arm-vs-fixed-rate-mortgage)](/blog/adjustable-rate-mortgage-guide)](/blog/arm-vs-fixed-rate-mortgage))

• 5/1 or 7/1 ARM: Low rate for 5-7 years
• Similar effect to buydown
• Rate adjusts after initial period
• Good if you're certain you'll move/refi

Larger Down Payment

• Put more down to lower loan amount
• Lower payment without rate gimmicks
• Builds equity faster
• Reduces/eliminates PMI

Negotiate Lower Price

• Sometimes better than buydown
• Permanent savings vs. temporary
• Lower property tax basis
• Lower loan amount

Bottom Line: Are Buydowns Worth It?

Buydowns are worth it when:

• Someone else (seller/builder) is paying
• You expect income to increase significantly
• You plan to refinance within 2-3 years
• You need help qualifying now
• Market is slow and you have negotiating leverage

Skip buydowns when:

• You're paying out of pocket in a falling rate environment
• Price is inflated to cover it
• You prefer payment stability
• Better uses for the money exist

The 2-1 buydown has become a powerful negotiating tool in the 2024-2026 housing market. In a high-rate environment, it helps bridge the affordability gap without requiring sellers to drop prices or builders to slash margins.

If you're house hunting in a buyer's market, don't be shy about requesting a seller-paid buydown. The worst they can say is no—and you might just get thousands in payment relief that carries you until refinance rates improve.

Calculate the numbers, understand the trade-offs, and use buydowns strategically—they're a tool, not a magic solution, but in the right situation, they can make the difference between buying now and waiting on the sidelines.

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