Mortgage Rate Buydowns Explained: 2-1, 1-0, and Permanent

Lower your monthly payment for the first 1-3 years — without changing your interest rate.

Rate buydowns are back in 2026 as sellers offer incentives to move properties.

I'm Bill McCoy (CA DRE #01212512). I structure buydowns regularly. Here's how they work and when they make sense.

What Is a Mortgage Rate Buydown?

A rate buydown temporarily reduces your interest rate for the first 1-3 years of the loan.

Example: 2-1 Buydown

• Actual rate: 6.5%
• Year 1: 4.5% (2% below actual)
• Year 2: 5.5% (1% below actual)
• Year 3-30: 6.5% (actual rate)

Your payment is lower at the start, then gradually increases.

Types of Buydowns

Temporary Buydowns

2-1 Buydown (Most Common)

• Year 1: 2% below note rate
• Year 2: 1% below note rate
• Years 3-30: Full note rate

1-0 Buydown

• Year 1: 1% below note rate
• Years 2-30: Full note rate

3-2-1 Buydown (Rare)

• Year 1: 3% below
• Year 2: 2% below
• Year 3: 1% below
• Years 4-30: Full rate

Permanent Buydown (Discount Points)

Pay upfront to permanently lower your rate.

Example:

• Pay 1 point (1% of loan amount) = 0.25% rate reduction
• Pay 2 points = 0.5% reduction
• Pay 3 points = 0.75% reduction

See when paying points makes sense

How Much Does a Buydown Cost?

2-1 Buydown Example:

• Loan amount: $500,000 at 6.5%
• Payment at 6.5%: $3,160/month
• Payment at 4.5% (year 1): $2,533/month
• Savings year 1: $627/month × 12 = $7,524

Year 2:

• Payment at 5.5%: $2,839/month
• Savings: $321/month × 12 = $3,852

Total savings: $11,376

Cost of buydown (paid at closing): ~$11,376

The savings are "pre-funded" at closing.

Who Pays for the Buydown?

Seller-Paid Buydowns

Most common in slow markets.

Seller offers a buydown as an incentive to attract buyers.

Example listing:
"$650,000 | Seller offers 2-1 buydown"

Translation: Seller credits buyer ~$11K at closing to fund the buydown.

Why sellers do this: Better than dropping the price $11K (which lowers comps and appraisal value).

Buyer-Paid Buydowns

You pay for it yourself at closing.

Why? You expect income to rise in 1-2 years and want lower payments now.

Lender-Paid (Rare)

Some lenders offer promotional buydowns to win business.

When Buydowns Make Sense

1. Seller-paid in a buyer's market
Free money. Take it.

2. Your income will increase soon
New job starting in 6 months? Spouse returning to work? Buydown bridges the gap.

3. You're stretching to afford the payment
Lower payments in years 1-2 help you qualify and ease into ownership.

4. You plan to refinance within 2 years
If rates drop, you'll refi before year 3 anyway. Enjoy the savings while they last.

5. New construction builders offering it
Builders frequently offer buydowns to move inventory.

When Buydowns Don't Make Sense

1. You can easily afford the full payment
Why pay for a buydown you don't need?

2. You're planning to sell within 2-3 years
You won't be around for the payment increases.

3. Seller is offering price reduction instead
Run the numbers. Sometimes a $10K price drop is better than a $10K buydown.

Temporary vs. Permanent Buydown

Feature	Temporary (2-1)	Permanent (Points)
Rate reduction	Years 1-2	Life of loan
Cost	Pre-funded savings	1-3% of loan amount
Payment	Increases over time	Fixed
Best for	Short-term relief	Long-term savings

Permanent Buydown Strategy

Paying discount points permanently lowers your rate.

Break-even calculation:

Example:

• Loan: $500,000
• Rate: 6.5% → 6.0% (pay 2 points)
• Cost: $10,000
• Monthly savings: $150
• Break-even: 67 months (5.5 years)

Pay points if:

• You'll stay in the home 7+ years
• You have cash to invest upfront

Don't pay points if:

• You might sell or refi within 5 years
• You'd rather keep the cash for reserves

New Construction Buydowns

Builders love offering buydowns.

Typical offer: "6.5% rate OR 4.5% with 2-1 buydown (builder-paid)"

Translation: Builder credits ~$10-15K toward your buydown at closing.

Why builders do this:

• Attracts buyers without dropping prices
• Keeps appraisals high
• Marketing angle ("rates as low as 4.5%!")

Your move: Negotiate. Ask for a price reduction instead if you'd prefer.

Buydown + Seller Concessions Strategy

Max seller concessions:

• Conventional: 3-9% depending on down payment
• FHA: 6%
• VA: 4%

Stack them:

• 2-1 buydown: $11K
• Closing cost credit: $8K
• Prepaid taxes/insurance: $3K
• Total seller credit: $22K (within limits)

Tax Implications

Temporary buydowns: Not deductible. The subsidy isn't considered interest paid by you.

Permanent buydowns (points): Deductible over the life of the loan (amortized).

Consult a CPA.

FAQ

Q: Do I need to qualify at the buydown rate or the actual rate?
A: The actual rate (6.5% in our example). Lenders underwrite at the note rate, not the subsidized rate.

Q: What if I refinance in year 1?
A: You lose the remaining buydown benefit. It's non-refundable.

Q: Can I do a buydown on an investment property?
A: Yes, but they're less common. Most buydowns are on primary residences.

Q: Are buydowns available on all loan types?
A: Yes — conventional, FHA, VA, jumbo all allow buydowns.

Q: Can I negotiate a buydown after I'm under contract?
A: Yes, through an addendum. Seller must agree.

Q: What's better: buydown or lower purchase price?
A: Depends. Lower price reduces your loan amount forever. Buydown is temporary relief. Run both scenarios.

Compare Your Options

Should you take the buydown, negotiate a price drop, or ask for closing cost credits?

Calculate Your Best Option

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Better Offers Inc | CA DRE #01212512