With the average 30-year fixed rate holding at 7.40% for the week ending October 15, according to Freddie Mac, sellers and builders are reaching for buydowns to get deals done. Price reductions hit a four-year high in September, according to Realtor.com data reported this week, and builders in particular are offering rate buydowns, closing cost help, and upgrades instead of just cutting price.
So you will hear this pitch: a 2-1 buydown. Before you say yes because the first year payment looks good, understand what it actually is.
What a 2-1 Buydown Does
A 2-1 buydown is a temporary buydown. Your note rate does not change. Instead, money is set aside in an escrow account, usually paid by the seller or builder, to subsidize your payment for the first two years.
Year one, your payment is figured as if your rate were 2 points lower. Year two, 1 point lower. Year three, you pay the full note rate for the rest of the loan.
Use the current average as a simple example. On a loan with a 7.40% note rate, a 2-1 buydown would feel like 5.40% in year one and 6.40% in year two, then the real 7.40% from year three on. The loan itself was always at 7.40%. Only the payment was helped, and only for a short window.
How That Is Different From Paying Points
A permanent buydown is different. You pay points at closing, where one point equals 1% of the loan amount, to lower the actual rate for the life of the loan. How much the rate drops for each point varies by lender and by day, so there is no honest universal number.
The test for points is break even math. Take the cost of the points and divide it by the monthly savings. That tells you how many months you need to keep the loan before the buydown pays for itself. If you might sell or refinance before that month, paying points can be money wasted.
A seller paid 2-1 buydown flips that test. If the seller or builder is funding it and it does not raise your price or your rate, your cost is not the issue. Your planning is. You need to know, today, that you can afford the year three payment at the full rate, because that payment is coming whether rates drop or not.
When a 2-1 Makes Sense, and When It Does Not
It can make sense when the seller pays for it, you plan to use the first two years of lower payments to build reserves or pay down other debt, and the full rate payment already fits your budget. It is a bridge, not a discount on the house.
It does not make sense when you can only afford the year one payment. That is not a strategy, that is a countdown. It also does not make sense to chase a temporary buydown while ignoring the total monthly expense picture: taxes, insurance, and the payment in year three matter more than a shiny first year number.
Do not pick a lender or a builder over an eighth of a point, and do not pick a buydown because the first year looks cheap on a flyer. Compare your payment in year one, year three, and across the time you actually expect to keep the loan. Educate yourself first, then decide.
The Bottom Line
In a 7.40% market with motivated sellers, a seller paid 2-1 buydown can be a useful tool. Just treat it for what it is: temporary help with the payment, not a lower rate for life. If the year three payment works for your budget, the buydown is a bonus. If it does not, walk away from that structure and look at a different house, a different price, or a permanent option you have actually run the break even math on.
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Michael Easton, NMLS #1964732, Powered by Edge Home Finance NMLS #891464
Frequently Asked Questions
What is a 2-1 buydown on a mortgage?
A 2-1 buydown is a temporary payment subsidy, usually paid by the seller or builder into an escrow account. Your payment is calculated 2 points below your note rate in year one and 1 point below in year two, then you pay the full note rate from year three for the rest of the loan.
Who pays for a 2-1 buydown?
In most current offers, the seller or builder pays for it as a concession to help sell the home. A buyer can pay for a buydown too, but if you are funding it yourself you should compare it against paying points or keeping the cash in reserves.
Is a temporary buydown better than paying points?
Neither is always better. A seller paid temporary buydown costs you nothing upfront but only helps for two years. Points cost you cash at closing and lower the rate for the life of the loan, so they only pay off if you keep the loan past the break even point.
What happens after a 2-1 buydown ends?
Your payment steps up to the full note rate payment in year three and stays there unless you refinance or sell. You should qualify and budget based on that full payment, not the discounted first year payment.
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