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What is a rate buydown?
There are two kinds of buydowns:
- Temporary buydown. Your rate is lower for the first year or two, then steps up to the full note rate (the rate written in your loan papers). Common versions are the 1-0 and the 2-1.
- Permanent buydown. Discount points (an upfront fee) are paid at closing to lower the note rate itself for the life of the loan.
The names tell you how many percentage points below the note rate you start, year by year. A 2-1 starts two points lower in year one, one point lower in year two, then goes to the full note rate. A 1-0 starts one point lower in year one, then goes to the full note rate.
How does a 2-1 or 1-0 temporary buydown work?
Your loan papers are written at the full rate. The buydown doesn't change that. Instead, the cost of the lower payments is figured up front and put into a buydown account at closing.
Each month, you pay part of the payment and that account pays the rest. Your lender gets the full payment either way.
For loans sold to Fannie Mae, the Selling Guide (B2-1.4-04) sets these rules:
- The rate can't be lowered by more than three percentage points.
- Your rate can't go up more than one percentage point per year.
- The buydown can't last more than three years.
- Buydown money must be held in a custodial account (a separate account, apart from the lender's own money). It can't be used to cover late payments or lower the loan amount.
- Temporary buydowns are allowed on primary homes and second homes. They're not allowed on investment properties or cash-out refinances.
- The buydown must be in a written agreement. That agreement must say you're still responsible for the full payment if the buydown money isn't available.
Hypothetical illustration — not a quote, offer or commitment to lend.
Say your loan has a note rate we'll call "N," with a 2-1 buydown.
- Year 1: your payment is figured at N minus 2 percentage points. The buydown account covers the gap between that and the full payment at N.
- Year 2: your payment is figured at N minus 1 percentage point. The account covers the smaller gap.
- Years 3 and beyond: you pay the full payment at N, and the account is used up.
The total put into the account is just the sum of all those monthly gaps. A 1-0 works the same way, with only the first-year step.
Do you qualify at the buydown rate or the full rate?
You qualify at the full rate. I want every buyer to hear this clearly. Fannie Mae requires lenders to qualify you based on the note rate, not the lower bought-down rate. The buydown makes the early years easier. It does not help you qualify for a bigger loan.
I think that's a healthy rule. When the payment steps up, you've already shown you can handle the full amount. A temporary buydown should be breathing room, not a bet that rates will fall or your income will grow in time.
Who pays for a rate buydown?
Buydown money can come from a few places, depending on the loan program and the deal:
- Seller. Common in purchase negotiations instead of a price cut.
- Builder. Often offered on new construction.
- Lender. Fannie Mae allows lender-paid buydowns, subject to its rules.
When the seller, builder or another interested party pays, the cost counts toward the program's limit on how much they can contribute. Fannie Mae's limits vary by occupancy and loan-to-value (your loan amount compared to the home's value). Anything over the limit is treated as a sales concession, which lowers the price used for your loan. FHA and VA loans have their own buydown and contribution rules. Before you write an offer that asks for a buydown, I'll confirm it fits within the limit for your loan.
Are discount points worth it? Break-even math
A permanent buydown uses discount points. The CFPB explains that one point equals 1% of the loan amount, paid at closing in exchange for a lower rate. Points can be partial, too.
Whether points are worth it depends on how long you keep the loan. Your break-even point is how many months it takes for the savings to pay back the cost:
Hypothetical illustration — not a quote, offer or commitment to lend.
If the points cost $4,000 and lower the monthly principal and interest by $100, break-even is 40 months. Keep the loan longer than that, and the points paid for themselves. Sell or refinance sooner, and you spent more than you saved.
The CFPB suggests points can make sense if you plan to keep the loan a long time. If you're not sure, it recommends comparing your shortest, longest and most likely time frames.
2-1 buydown vs. 1-0 buydown vs. points
| Factor | 2-1 buydown | 1-0 buydown | Permanent (points) |
|---|---|---|---|
| How long the lower rate lasts | Two years | One year | Life of the loan |
| Changes the note rate? | No | No | Yes |
| Rate you qualify at (Fannie Mae) | Note rate | Note rate | The lower note rate |
| Where the money goes | Separate buydown account | Separate buydown account | Paid at closing as points |
| Good fit when | You want more breathing room early on | You want a smaller, cheaper cushion | You plan to keep the loan past break-even |
What happens to a buydown if you refinance or sell?
You don't lose the leftover money. Under Fannie Mae's guide, buydown funds aren't refundable unless the loan is paid off before all the money is used. If you pay off the loan early, by refinancing or selling, the rest is either credited toward your payoff or returned to you (or to the lender, if the lender paid for it). The written buydown agreement spells out which. If the home is sold and the buyer takes over (assumes) the loan, the buydown can keep lowering payments under the original terms.
So a temporary buydown isn't wasted if rates drop and you refinance early. Read your buydown agreement so you know exactly how leftover money will be handled.
If you're weighing a buydown against a price cut, or a 2-1 against points, I'm happy to run the comparison. All loans are subject to credit approval, program guidelines and property eligibility.
Common questions about this topic
Do I qualify at the lower buydown rate?
Not on loans sold to Fannie Mae. Its Selling Guide requires lenders to qualify you at the full note rate, not the lower bought-down rate.
What happens to unused buydown funds if I refinance?
Under Fannie Mae's guide, if the loan is paid off before the money is used up, the rest is credited toward the payoff or returned to the borrower (or lender, if the lender paid for it). The buydown agreement spells out which.
Can the seller pay for my buydown?
Yes. Seller-paid buydowns count toward the program's limits on how much an interested party can contribute. Fannie Mae's limits vary by occupancy and loan-to-value.
Can I use a temporary buydown on an investment property?
Not on a Fannie Mae loan. Temporary buydowns are allowed on primary homes and second homes, but not investment properties or cash-out refinances.
Is a 2-1 buydown better than paying points?
It depends on your plans. A 2-1 lowers payments for two years only. Points lower your rate for the life of the loan. They mainly make sense if you keep the loan past the break-even point.
This information is general education and may not reflect every lender's or investor's guidelines. Guidelines change; verify current requirements for your situation. Subject to credit approval, underwriting, program guidelines and property eligibility. Not a commitment to lend.