Buydown programs: Lower your rate in the early years

What is a buydown?

A buydown temporarily reduces your mortgage interest rate during the first few years of the loan. Someone (often the seller or builder) pays an upfront fee at closing, and in exchange, you get a lower rate that gradually increases to the full rate.

Think of it as pre-paying some interest to get lower payments early on.

How a 2-1 buydown works

With a 2-1 buydown, your rate is reduced by:

• 2% below the note rate in year 1
• 1% below the note rate in year 2
• Full note rate from year 3 onward

Example with a $400,000 loan at 6.5% note rate:

Year	Rate	Monthly Payment
Year 1	4.5%	$2,027
Year 2	5.5%	$2,271
Year 3+	6.5%	$2,528

The difference between the reduced payments and full payments gets paid upfront at closing, typically by the seller.

How a 3-2-1 buydown works

A 3-2-1 buydown extends the benefit an extra year:

• 3% below the note rate in year 1
• 2% below the note rate in year 2
• 1% below the note rate in year 3
• Full note rate from year 4 onward

This costs more upfront but provides even lower initial payments.

Who pays for the buydown?

The buydown fee is usually paid by:

Sellers: In competitive markets, sellers may offer buydowns to attract buyers. It can help their home stand out.

Builders: New construction often includes buydown incentives to move inventory.

Buyers: You can pay for your own buydown if the seller won't contribute.

Lenders: Some lenders offer buydowns using lender credits, though this typically comes with a slightly higher note rate.

When buydowns make sense

Buydowns work well when:

You expect your income to increase: If you're early in your career or expecting raises, the lower initial payments give you room to grow into the full payment.

You want to qualify for more home: Lenders use the first-year payment for qualifying (in most cases), so a buydown can help you qualify for a higher purchase price.

Rates might drop: If you get a buydown when rates are high, you can refinance later if rates fall. You got the benefit of lower payments in the meantime.

The seller is offering concessions: If a seller is willing to contribute to closing costs anyway, applying those funds to a buydown can be more valuable than other uses.

The cost

Buydown costs vary but typically run:

• 2-1 buydown: 1.5-2% of loan amount
• 3-2-1 buydown: 2.5-3% of loan amount

On a $400,000 loan, that's roughly $6,000-8,000 for a 2-1 or $10,000-12,000 for a 3-2-1.

Buydown vs. paying points

Both buydowns and discount points reduce your rate, but they work differently:

Points: Permanently lower your rate for the life of the loan. You pay upfront, and your rate is lower forever.

Buydown: Temporarily lower your rate for 2-3 years. The funds go into an escrow account and are applied to your payments during the buydown period.

Points make more sense if you're staying long-term. Buydowns make more sense if you might refinance or sell within a few years.

Qualifying with a buydown

Most loan programs allow buydowns on conventional, FHA, and VA loans. The lender typically qualifies you based on:

• Year 1 payment (some programs)
• Year 2 payment (some programs)
• Full note rate payment (most conservative)

We'll confirm qualifying requirements for your specific situation.

What happens to unused funds?

If you refinance or sell before the buydown period ends, any remaining funds in the buydown escrow account typically go back to whoever funded it (usually the seller). Check the specific terms, as they can vary.

Is a buydown right for you?

Buydowns aren't for everyone. They make most sense when someone else is paying (seller, builder) and when you have a realistic plan for handling the higher payments when the buydown expires.

If you're stretching to afford a home and counting on the buydown to make it work, that's risky. Your income needs to reliably increase, or you need a refinance plan.

See if a buydown could help

We can run the numbers for your situation and help negotiate buydown terms if it makes sense. Get pre-qualified or schedule a call to explore your options.