How a Temporary Rate Buydown Works (3/2/1, 2/1, 1/1, & 1/0 Options)
In today’s higher-rate environment, a temporary rate buydown is a powerful strategy to make your mortgage payments more affordable in the early years—especially when a seller credit can cover the cost at closing.
What Is a Temporary Rate Buydown?
A temporary buydown lowers the interest rate—and monthly payment—for a set number of years at the start of the loan. Upfront funds are placed into a buydown escrow account and used monthly to subsidize the difference between your reduced payment and the actual note payment. The funds are typically provided by the seller when negotiating the sales contract.
Buydown Structures Explained
- 3-2-1 Buydown: Rate reduced by 3% in year one, 2% in year two, and 1% in year three. Then reverts to the full note rate.
- 2-1 Buydown: Rate reduced by 2% in year one, 1% in year two, then returns to standard rate.
- 1-1 Buydown: 1% rate reduction in both year one and year two.
- 1-0 Buydown: 1% reduction in year one only.
How It Works at Closing
The seller agrees to pay an amount equal to the total interest savings during the buydown period. These funds are deposited into a buydown escrow account and applied monthly to reduce the buyer’s payment. Your note rate and qualifying rate remain the same—only your first few years of payments are reduced.
What Happens If You Refinance Before the Buydown Period Ends?
If you refinance while there are still unused funds in the buydown escrow account, the remaining balance is applied as a principal reduction on your mortgage payoff. This means you do not lose the unused benefit—the funds directly lower the amount you owe at the time of refinance.
When a Temporary Rate Buydown Makes the Most Sense
A temporary buydown can be an excellent fit for certain borrowers, including:
- Borrowers expecting a raise or higher income soon (e.g., salary increase, promotion, or increased commissions).
- Those with large short-term expenses—like a car loan, student loan, or personal debt—that will be paid off before the buydown period ends.
- Buyers who want to ease into homeownership costs while adjusting to other financial changes.
- Borrowers anticipating a lower-rate refinance in the near future if interest rates drop.
Best Practices for Negotiating a Temporary Buydown
- Confirm the program type and buydown structure with your lender early in the process.
- Negotiate the buydown cost as a seller credit in the purchase contract.
- Use the correct buydown type for your financial situation (3/2/1, 2/1, 1/1, or 1/0).
See Your Savings with Our Buydown Calculator
Want to know exactly how much you could save? Use our custom buydown calculator to compare temporary rate scenarios side-by-side:
Try the Temporary Rate Buydown Calculator
Final Thoughts
A temporary rate buydown—especially when funded by the seller—is an excellent way to reduce financial pressure in the early years of your mortgage. It’s particularly helpful if you know your financial situation will improve before the buydown period ends. Just be sure you’re prepared for the payment to adjust to the full note rate.
Need Help Choosing the Right Option?
As your trusted loan advisor, I can walk you through temporary buydowns and help find the structure that suits your budget and goals. Let’s explore your options—together.
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