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Key takeaways
- On a $400,000 loan at 6.5%, a 2-1 buydown cuts the year-1 payment by $501.53 and the year-2 payment by $257.12, and costs about $9,104 in total.
- The rate is lowered only temporarily. Your payment steps up to the full amount after year 2.
- Someone has to fund the subsidy at closing, usually the seller or builder.
- Many lenders qualify you on the full-rate payment, so a buydown helps cash flow more than it helps approval.
What this 2-1 buydown calculator does
A temporary buydown lowers your interest rate for the first one to three years and then returns it to the note rate. The calculator takes your loan, note rate and term and shows the payment for each year, the saving each year, the total subsidy needed to fund it, and the payment increase when the buydown ends. If a seller or builder offered a credit, enter it to see whether it covers the cost.
How a buydown works
Take a 2-1 buydown on a 6.5% loan. In year 1 you pay the payment for a 4.5% rate, in year 2 the payment for 5.5%, and from year 3 the full 6.5% payment. The lender does not forgive the interest: a subsidy account, funded at closing, pays the difference each month. Because of that, your loan balance still falls on the note-rate schedule, and the extra cost is simply the sum of the payment differences. A 3-2-1 works the same way over three years, and a 1-0 over one.
How it is calculated
Each year’s payment is the standard fixed-rate payment M = L × r × (1 + r)n ÷ ((1 + r)n − 1) at the reduced rate, with the same loan amount and the full term. The subsidy for a year is (note-rate payment − reduced payment) × 12, and the total cost is the sum over the buydown years.
Worked example: $400,000 at 6.5% for 30 years
The note-rate payment is $2,528.27.
| 2-1 | 3-2-1 | 1-0 | |
|---|---|---|---|
| Year 1 payment | $2,026.74 (4.5%) | $1,796.18 (3.5%) | $2,271.16 (5.5%) |
| Year 2 payment | $2,271.16 (5.5%) | $2,026.74 (4.5%) | $2,528.27 |
| Year 3 payment | $2,528.27 | $2,271.16 (5.5%) | $2,528.27 |
| Total subsidy cost | $9,104 | $17,889 | $3,085 |
| Payment jump at the end | $257.12 | $257.12 | $257.12 |
For comparison, a permanent alternative: one discount point costs $4,000 on this loan and, at an illustrative 0.25% rate cut per point, saves $65.40 a month for the life of the loan, breaking even in about 62 months. The 2-1 saves more per month at first but only for two years. Use a real rate sheet in the points calculator.
When a buydown makes sense
When someone else is paying
A seller or builder credit that would otherwise be lost can be worth more as a buydown than as a small price cut, especially if you expect a higher income or a refinance. Compare the same dollars as a price reduction on the main mortgage calculator.
When you can afford the full payment
Treat the full note-rate payment as your real payment. If you could not afford it in year 3, the buydown only delays the problem. Check your budget with the affordability calculator.
When you may refinance
Some buyers plan to refinance if rates fall, which is a bet and not a plan. Test it with the refinance calculator.
Estimate only, for principal and interest. It leaves out taxes, insurance, PMI and any fees. Terms and seller-contribution limits vary by lender and loan type. Not a loan offer or financial advice.
Frequently asked questions
What is a 2-1 buydown?
A 2-1 buydown is a temporary rate reduction. Your rate is 2 percentage points below the note rate in year 1 and 1 point below in year 2, then it returns to the full note rate for the rest of the loan. The difference in payment is paid from a subsidy account funded at closing, usually by the seller, builder or lender.
How much does a 2-1 buydown cost?
It costs the total of the payment differences. On a $400,000 loan at a 6.5% note rate for 30 years, the year-1 payment drops by $501.53 and the year-2 payment by $257.12 a month, so the subsidy is about $9,104. A 3-2-1 on the same loan costs about $17,889, and a 1-0 about $3,085.
Who pays for a buydown?
Often the seller or a builder, as a concession or credit, but a lender or the buyer can pay too. Limits on seller contributions vary by loan type and down payment, so confirm what your lender allows before you negotiate on it.
Do I qualify based on the lower payment?
Often not. Many lenders qualify you using the full note-rate payment, since the lower payment is temporary. Ask your lender how your loan type treats a temporary buydown before you rely on it to qualify.
What happens when the buydown ends?
Your payment steps up to the full note-rate payment. On the default example, a 2-1 buydown ends with a $257.12 monthly increase from year 2 to year 3. Plan for that step, because you cannot count on refinancing to a lower rate.
Is a buydown better than a lower price or permanent points?
They solve different problems. A price cut lowers your loan for the whole term. Permanent points lower the rate for the whole term and are paid by you. A temporary buydown lowers only the first one to three years. Compare the same dollar amount in each form, and use the points calculator for the permanent option.
What if I sell or refinance before the buydown ends?
It depends on the agreement. Unused subsidy funds are often applied to the loan balance or returned, but the terms differ, so ask for the written terms.