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High mortgage rates got you down? There's a loan option to combat high rates that's gaining in popularity. It's called a 2-1 buydown or temporary buydown.

This program reduces your rate and payment for the first two years of homeownership, freeing up funds and making it easier to afford to buy a home.

Here's how to buy a home using a 2-1 buydown.

How does a 2-1 buydown work?

A 2-1 buydown is a program in which a home buyer, seller and/or builder pays to reduce the buyer's mortgage rate temporarily, making the first two years of homeownership more affordable.

The seller kicks in enough money to reduce the buyer's mortgage rate by 2% the first year and 1% the second year. The mortgage carries the standard rate and payment in years 3-30.

YearMortgage rate reductionYear 12% rate reductionYear 21% rate reductionYears 3-30Standard rate

Here's how a temporary buydown might play out using hypothetical interest rates.

YearExample rateExample payment ($300k loan)*14.0%$1,43225.0%$1,6103-306.0%$1,799*Principal and interest only. Taxes, insurance or HOA not included. Rates and payments are for example purposes only and do not reflect currently available rates. Not an offer to lend.

This structure saves the buyer $367 per month the first year and $189 per month the second year on a $300,000 mortgage. These extra funds can go a long way toward making a home more affordable, just when a new homebuyer needs it most.

Another buydown form that may be available is the 1-0 buydown. This is when the seller buys down the rate for the first year only.

Still another form of temporary buydown is when the buyer supplies the funds. However, you might have a hard time finding a lender who offers the buyer-financed option.

How to use a 2-1 buydown instead of an adjustable rate mortgage

Adjustable rate mortgages are becoming more popular as rates rise. They are a great tool to reduce your rate and payment.

But they come with risks, too. Typically after five years, they can increase up to 1% per year for five years, leaving you with a very high rate.

A 2-1 buydown, however, is more predictable. It's a fixed-rate loan. You know exactly what your payment will be in year one, year two, and years 3-30. But it still gives you a low introductory payment when you need it most: at the beginning of your loan.

If you like the idea of very affordable homeownership when you start, but don't like the idea of an adjustable rate, a 2-1 buydown could work for you.

How does the seller pay for the rate reduction?

The seller prepays a portion of each month's payment for the first two years, effectively bringing down the payment as if the rate were reduced. The rate on the mortgage does not actually change. Here's how that works.

The lender adds up the entire subsidy required to reduce the payment over two years. Then the seller contributes that much into an escrow account to be drawn on each of the first 24 months of the loan.

Here's an example of seller-paid incentives that reduce the payment on a $300,000 loan.

Year 1Year 2Standard payment$1,799$1,799Reduced payment$1,432$1,610Monthly reduction$367$189Annual reduction (monthly X 12)$4,404$2,268Seller pays total 24-month reduction into an escrow account$6,672Rates and payments are for example purposes only and do not reflect currently available rates. Not an offer to lend.

In the example above, funds from the seller and possibly also the buyer effectively reduce the payment for two years by contributing $6,672 towards the payments.

Why would a seller offer a temporary buydown?

The seller or builder might offer a temporary buydown to attract more buyers to the property. Or, the buyer could request this incentive if they are considering a home that has no other offers or is priced too high.

The market is changing in mid-2022. Rates are rising and sellers are not getting as many offers as they used to. Additionally, buyers are finding it harder to afford a home as rates climb.

A 2-1 or 1-0 buydown could attract a buyer and encourage an offer on one home over others. It could be a win-win for buyer and seller.

What are the requirements for a 2-1 buydown?

Typically these work the best when the seller or builder is paying for most of the temporary buydown. But, you're allowed to contribute to your own buy down as well, with limits.

Also, they are typically only for a 1-2 unit home you plan to live in. No triplexes, fourplexes, or investment properties

Additionally, you can only combine a 2-1 buydown with certain loan types. Check with your lender if you are using an FHA loan, VA loan, USDA loan, HomeReady, or other programs. Sometimes a buydown is compatible, sometimes not.

Keep in mind that there are limits to how much the seller can contribute toward the purchase. A buydown is considered an interested party contribution or IPC and these are limited on nearly every loan type.

For instance, if you're putting less than 10% down on a conventional loan, the seller contribution maximum is 3% of the home's price. On a $300,000 home, that's $9,000. Combined contributions from the seller, agent, lender, or any other party in the transaction can't exceed that amount. The contribution limits rise with a higher down payment.

As the buyer, you're also limited to paying 3% toward your own rate reduction due to lending rules.

Check with your lender for your loan type and down payment amount and make sure the 2-1 buydown total falls within guidelines.

Can you qualify using the lower payment?

No. You have to qualify assuming the full payment. So a 2-1 buydown doesn't help you qualify for the loan if your debt-to-income ratio is too high.

Who is a 2-1 buydown good for?

A temporary buydown works great for many situations

  • Those whose income will increase in the next two years
  • When a spouse will return to the workforce in 1-2 years
  • Buyers who want a lower initial payment but don't want an adjustable rate loan
  • Anyone wanting a lower payment in the first years of homeownership

2-1 buydown FAQs

What is a 2-1 buydown? A 2-1 buydown is when a home seller effectively buys down a homebuyer's mortgage rate by 2% the first year and 1% the second year. In years 3-30, the mortgage rate returns to its standard level.

How much does a 2-1 buydown cost? A 2-1 buydown costs the difference between the standard mortgage payment and the reduction in payments for two years. The rate is reduced by 2% the first year and 1% the second year. The cost depends on the base interest rate and loan amount. For example, if the payment is reduced by $200 the first year and $100 the second year, the total cost of the buydown would be ($200 X 12) + ($100 X 12) = $3,600.

What is a 3-2-1 buydown A 3-2-1 buydown is when the seller or another party in the transaction pays to reduce the rate by 3% the first year, 2% the second year, and 1% the third year. In years 4-30, the standard rate and payment apply.

What is a 1-0 buydown? This is similar to a 2-1 buydown, but the rate is reduced by 1% the first year and returns to the base rate and payment in years 2-30.

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