Temporary rate buydowns: how a 2-1 buydown works and what it costs

How a temporary buydown works

The CFPB describes a temporary buydown as a lower payment for a limited time, usually one to three years, in exchange for an upfront fee or a higher rate later. The names typically describe the yearly steps: a 3-2-1 buydown starts 3 percentage points below the note rate and rises one percentage point a year, a 2-1 starts 2 percentage points below, and a 1-0 lowers only the first year.

Fannie Mae’s Selling Guide sets the limits for loans it buys: a reduction of no more than 3 percentage points, increases of no more than 1 percentage point a year, and a buydown period of no more than three years. The money must be held in a custodial account, and the loan documents show the permanent terms. FHA’s Handbook 4000.1 requires an escrow for the funds. Under both, you remain responsible for the full note payment if the buydown money is not available for any reason.

Sources: CFPB: Why mortgage payments change · Fannie Mae Selling Guide: Temporary interest rate buydowns · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Who pays, and how much a seller can contribute

Fannie Mae requires a written agreement between whoever funds a buydown and the borrower. When the lender pays, Regulation Z’s official interpretation notes that the loan is typically set up with a higher-than-usual rate for the rest of the term. Fannie Mae does not count a lender as an interested party unless it is the seller or is affiliated with an interested party, such as a builder. FHA’s Handbook 4000.1 does count lenders as interested parties, but it excludes premium pricing credits (lender credits that come from a higher rate) when the lender is not the seller, agent, builder, or developer.

When the seller, builder, or another interested party pays, the cost counts toward limits on interested party contributions, often called seller concessions. For a principal residence or second home, Fannie Mae’s Selling Guide caps them at 3% of the lower of the sales price or appraised value when the loan-to-value ratio is above 90%, 6% from 75.01% to 90%, and 9% at 75% or less. FHA’s Handbook 4000.1 allows up to 6% of the sales price, including payments for temporary and permanent buydowns. Under both, contributions above the limit, or above your actual closing costs, prepaid items, and discount points, are generally treated as a reduction in the price, and the loan-to-value ratio is figured on the lower amount.

Sources: Fannie Mae Selling Guide: Temporary interest rate buydowns · Fannie Mae Selling Guide: Interested party contributions · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · CFPB: Regulation Z comment 17(c)(1), buydowns in disclosures

You qualify at the full rate, and not every loan allows a buydown

A buydown lowers what you pay at first, not what you must show you can afford. Fannie Mae requires lenders to qualify you based on the note rate without considering the bought-down rate, and FHA’s Handbook 4000.1 requires the lender to use the note rate when calculating principal and interest on a loan with a temporary buydown. Your debt-to-income ratio therefore uses the full payment, so a buydown does not help you qualify for a larger loan.

The rules also limit where buydowns are allowed. Fannie Mae permits them on fixed-rate loans and certain adjustable-rate mortgages for principal residences and second homes, but not on investment properties or a cash-out refinance. FHA does not permit temporary buydowns on its refinance transactions or on its adjustable-rate loans. Other programs and lenders set their own rules, so ask which ones apply to your loan.

Sources: Fannie Mae Selling Guide: Temporary interest rate buydowns · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

A 2-1 buydown, year by year

Take a hypothetical $425,000 home bought with $85,000 down: a $340,000, 30-year fixed loan at a note rate of 6.875%. The rate is an illustration, not a quote; for context, Freddie Mac’s survey average for a 30-year fixed loan was 7.03% for the week of September 24, 2026. The full principal-and-interest payment is $2,233.56. With a 2-1 buydown, you pay as if the rate were 4.875% in year 1 ($1,799.31) and 5.875% in year 2 ($2,011.23), and the buydown account pays the rest.

The cost of the buydown is the sum of those monthly gaps: $434.25 a month for 12 months ($5,211.00) plus $222.33 a month for 12 months ($2,667.96), or $7,878.96 in total. An actual agreement’s schedule may differ slightly. Fannie Mae sets no separate dollar cap on a buydown, but a seller-paid one counts toward the contribution limit. This one is 1.9% of the price. Fannie Mae’s 6% limit at this 80% loan-to-value ratio ($25,500 if the home appraises at the price) and FHA’s 6% limit cover all interested party contributions combined, and both programs generally cap contributions at your actual closing costs.

Sources: Freddie Mac: Mortgage rate survey archive · Fannie Mae Selling Guide: Temporary interest rate buydowns · Fannie Mae Selling Guide: Interested party contributions · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Plan for the payment jumps

The CFPB lists the end of a temporary buydown among the common reasons a mortgage payment goes up. In the example, the payment rises by $211.92 at the start of year 2 and by $222.33 at the start of year 3, when it reaches the full $2,233.56. That is $434.25 a month more than in year 1, or $5,211 a year. If you have an escrow account, changes in taxes or insurance can add to or offset the jump.

Treat the year 3 payment as your real payment from the start, and test it by setting aside the difference each month during the buydown years. If the full payment would strain your budget, the buydown only delays the problem. Refinancing before the buydown ends depends on future rates and your finances, and it may not be possible or worth new closing costs.

Sources: CFPB: Why mortgage payments change

The same money three ways

Suppose a seller agrees to put $7,879 toward your purchase. You could take it as the 2-1 buydown above. You could apply it to permanent discount points: the CFPB notes that one point equals 1% of the loan amount, $3,400 here, so the money buys 2.32 points. Assume a hypothetical rate sheet offers 6.375% at that price, cutting the payment to $2,121.16, $112.40 less a month for all 30 years. Fannie Mae and FHA count seller-paid points toward the same limits. Or you could ask for a price $7,879 lower. With the same $85,000 down, the loan falls to $332,121 and the payment to $2,181.80 at 6.875%, $51.76 less a month.

The table measures net savings against the same loan with no seller money: the principal and interest you did not pay, plus the lower balance you would still owe. The buydown saves the most cash early, $45,726 of payments over two years against $53,605 with no seller money, but its savings stop at $7,879. The points keep paying off and pass the buydown in month 56. The price cut stays ahead of the buydown on net savings throughout, because it removes $7,879 of debt at closing. The points overtake the price cut in month 80.

For points, the CFPB’s page on discount points suggests asking for total costs over the shortest, longest, and most likely time you expect to keep the loan, and the same test works here. The CFPB also notes that a seller who gives a closing cost credit will usually require a higher price. These results rest on a hypothetical price for points and ignore taxes. A HUD-certified housing counselor can help you compare real quotes.

Sources: CFPB: Points and lender credits · Fannie Mae Selling Guide: Interested party contributions · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · CFPB: Fees paid at closing

How it shows up on your Loan Estimate and Closing Disclosure

Under Regulation Z’s official interpretation, when a seller or other third party pays for a buydown and your loan contract does not include the lower rate, the APR and the projected payments on the Loan Estimate and Closing Disclosure must not reflect the buydown; they show the full note-rate payment. The seller’s payment appears as a seller credit in the summaries of transactions on page 3 of the Closing Disclosure. If the lower rate is written into the loan contract, the disclosures generally must show both payment levels and a composite APR (one APR that blends the lower and full rates).

If you pay for a buydown yourself, the interpretation treats your payment as a prepaid finance charge, even if it is deposited in an escrow account, and the disclosures must show each rate and payment level and a composite APR. When you and a seller split the cost, only your share is treated that way. A seller-paid buydown may not appear in the payment figures at all, so ask for the buydown agreement early and check its schedule.

Sources: CFPB: Regulation Z comment 17(c)(1), buydowns in disclosures

If you sell or refinance before the buydown ends

Fannie Mae’s Selling Guide says your only interest in buydown funds is to have them applied to your payments as they come due; they cannot cover past-due payments. If the loan is paid off during the buydown period, as in a sale or refinance, the remaining funds should be credited toward the payoff, or they may be returned to you or to the lender that funded them, as the agreement specifies.

Under FHA’s rules, the escrow agreement may not let unused funds go back to whoever provided them if the home is sold or the loan is prepaid in full, and may not pay them to you in cash unless your own money funded the account. In the example, a sale or refinance after 12 months would leave $2,667.96 unused. Read the agreement’s payoff terms before closing so you know where that money would go.

Sources: Fannie Mae Selling Guide: Temporary interest rate buydowns · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Your next-step checklist

• Get the dollar amount of any seller or builder concession in writing.
• Confirm that you qualify at the full note-rate payment.
• Check the contribution limit for your loan type and down payment.
• Compare a buydown, points, and a lower price over your likely timeline.
• Read the buydown agreement’s payment schedule and payoff terms.
• Set aside money for each payment increase before it arrives.