What Is a 2-1 Buydown?

Short answer

A 2-1 buydown is a temporary rate reduction: your payment is calculated at 2 percentage points below the note rate in year one and 1 point below in year two, then at the full note rate from year three on. The difference is prepaid at closing into an escrow account, almost always by the seller or builder as a concession. You qualify at the full note rate, so it does not increase your buying power; it lowers your payments while you settle in.

Definition

A temporary buydown is a seller- or builder-funded subsidy that covers part of the borrower's interest for the first one to three years. The note rate never changes; the escrowed subsidy makes up the difference each month, and any unused balance is applied to the loan if you refinance or sell early.

Worked example

Loan $450,000, 30-year fixed, note rate 6.75%, full principal and interest about $2,919. Year one at 4.75%: about $2,347, a difference of $572 a month, or $6,864 for the year. Year two at 5.75%: about $2,626, a difference of $293 a month, or $3,516 for the year. Total buydown cost: $6,864 + $3,516 = $10,380, which the seller deposits at closing. Compare: the same $10,380 used as discount points might permanently lower the rate by roughly 0.5% depending on pricing, saving about $150 a month forever. Which is better depends on how long you keep the loan and whether rates fall. Rates are illustrative and vary daily.

How a 2-1 buydown works

• Year 1: payment calculated at note rate minus 2%.
• Year 2: payment calculated at note rate minus 1%.
• Years 3 to 30: payment at the full note rate.
• The subsidy is held in a buydown escrow and released monthly to the servicer.
• You qualify at the note rate; the buydown does not help DTI.
• Variants: 1-0 (one year) and 3-2-1 (three years).

Buydown vs points vs price cut

A seller concession can fund a temporary buydown, permanent discount points, or closing costs. A price cut lowers your loan, Florida doc stamps and intangible tax, and property taxes slightly, but changes the payment less than a buydown in early years. If you expect to refinance within two or three years, a buydown captures most of the benefit; if you plan to stay, permanent points or a price reduction usually win.

In South Florida

Buydowns are common on new construction in Doral, Homestead, Miramar and western Broward, where builders advertise 'below-market' first-year payments funded through their preferred lender. Two things to check: you can usually ask QMS Lending to match or beat the builder's offer with a buydown funded by the same builder credit, and the subsidy must fit within the program's seller concession limits along with any closing costs the builder pays. Also plan for year three: in South Florida your taxes and insurance will likely have risen by then too, so the payment jump is larger than the rate change alone.