Mortgages & Home Loans Managing a Home Loan What Is a 2-1 Buydown? A 2-1 Buydown Explained in Less Than 4 Minutes By Jamie Johnson Jamie Johnson Website Jamie Johnson is a sought-after personal finance writer with bylines on prestigious personal finance sites such as Quicken Loans, Credit Karma, and The Balance. Over the past five years, she’s devoted more than 10,000 hours of research and writing to topics like mortgages, loans, and small business lending. learn about our editorial policies Updated on May 30, 2022 Reviewed by Lea D. Uradu Reviewed by Lea D. Uradu Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. 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Jess has a journalism degree from the University of Maryland Philip Merrill College of Journalism. learn about our editorial policies In This Article View All In This Article Definition and Examples of a 2-1 Buydown How a 2-1 Buydown Works Pros and Cons of a 2-1 Buydown Alternatives to a 2-1 Buydown Photo: Klaus Vedfelt / Getty Images Definition A 2-1 buydown loan lets you temporarily lower your interest during the first couple of years of homeownership in exchange for an upfront additional charge. Definition and Examples of a 2-1 Buydown A 2-1 buydown loan lets you temporarily lower your interest during the first couple of years of homeownership in exchange for an upfront additional charge. During the first year of homeownership, you’ll pay an interest rate that’s 2% lower than your standard rate. In the second year, your interest rate will be 1% lower than the agreed-upon rate. Once the first two years are up, you’ll begin paying the permanent interest rate on your mortgage. In exchange for a lower rate, the difference is paid through a one-time fee, or point, when you close on your home. This fee is usually deposited in an escrow account, and a small amount is paid out every month to cover the difference. Through this process, you are essentially buying your way into obtaining a lower interest rate for a two-year period. Alternate name: temporary buydown Note A 2-1 buydown may sound appealing, especially if you don’t have to pay the escrow fee. But the exact details of your mortgage will depend on the lender. How a 2-1 Buydown Works With a 2-1 buydown loan, the borrower pays a lump sum upfront, ensuring a temporarily lower interest rate for the first two years of homeownership. To help you better understand a 2-1 buydown, let’s look at an example of how one would play out. Let’s say you’re purchasing a $250,000 home with a 5% fixed interest rate. If you agree upon a 2-1 buydown, you’ll pay 3% in interest for the first year of homeownership. During that year, your monthly mortgage payment would be $1,337.34. After that year is up, your interest rate will go up to 4% and your monthly payments would go up slightly to $1,476.87. After the two years are up, you’ll begin paying your permanent rate of 5% and your monthly payments will stay at $1,766.17. This arrangement allows you to save money on your monthly mortgage payments during those two years. During the first year of your 2-1 buydown, you’ll save $428.83 per month and during the second year, you’ll save $289.30 per month. Of course, the difference of $8,617.56 has to be paid upfront and deposited into an escrow account. Note During the homebuying process, you can negotiate to get the seller or builder to fund the fee associated with a 2-1 buydown. In particular, a seller or builder may be willing to pay the fee if the home has been on the market for a long time. Your real estate agent can help you negotiate this during the offer stage. Pros and Cons of a 2-1 Buydown Pros Pay less money upfront on your monthly paymentsEases you into making monthly mortgage paymentsSaves you money during the first two years of homeownership Cons Comes with a high upfront costPotential problems with escrow Pros Explained Pay less money upfront on your monthly payments: With a 2-1 buydown, your interest rate is lower for the first two years of homeownership. As a result, your monthly payments will be lower than a traditional payment plan too. Eases you into making monthly mortgage payments: Making lower mortgage payments for the first two years can be a good way to ease into homeownership. This way, you’ll become more accustomed to the process and save money, too. Saves you money during the first two years of homeownership: Due to the reduced rate, you can save the difference in your mortgage payments. This way, you can save for other short- and long-term financial goals. Cons Explained Comes with a high upfront cost: A 2-1 buydown is really only worth the price if you can get the seller to pay the escrow deposit. Otherwise, you’ll have to pay a large upfront fee. Potential problems with escrow: If, for any reason, the escrow agent doesn’t send the payment, then the mortgagor (i.e., you) would be responsible for paying the difference. Alternatives to a 2-1 Buydown If you’re interested in a buydown program, but you’re not sure if a 2-1 buydown is right for you, here are a few alternatives you can consider. 1-0 Buydown With a 1-0 buydown, you’ll pay an interest rate that’s 1% lower than the agreed-upon rate during your first year of homeownership. For example, if your regular interest rate is 5%, it’ll be 4% for the first year. You won’t lower your mortgage payments as much as you would with a 2-1 buydown, but you’ll also have to pay less money upfront. 1-1-1 Buydown With a 1-1-1- buydown, you’ll pay an interest rate that’s 1% lower for the first three years of homeownership. This can help you ease into your mortgage payments before the interest rate deduction expires. 3-2-1 Buydown In a 3-2-1 buydown, your interest rate will be 3% lower the first year, 2% lower the second year, and 1% lower the third year before adjusting to your fixed rate. This is a great way to lower your monthly mortgage payments, but the initial escrow payment could be substantial. Key Takeaways A 2-1 buydown lets you temporarily lower your interest rate for the first two years of homeownership in exchange for a one-time fee due at closing.During the offer stage, your real estate agent can negotiate with the home’s seller or builder to try to get them to pay the one-time upfront fee.A 2-1 buydown can be a good way to lower your monthly payments and pay less during your first two years of homeownership.If a problem arises with the escrow payments, you’ll be responsible for paying the difference. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. New American Funding. "Buydown Loan." Accessed Aug. 23, 2021.