Mortgage Rate Buydowns Explained: 2-1, 1-0, and Permanent Buydowns

Updated April 2026

What Is a Rate Buydown?

A rate buydown is exactly what it sounds like — someone pays money upfront to "buy down" your interest rate. The payment goes into an escrow account that subsidizes your mortgage payment for a set period. Your monthly payment is lower in the early years of the loan, and then it steps up to the full rate.

Think of it like this: the buydown funds cover the difference between what you'd normally pay and what you actually pay during the buydown period. The money sits in an account and gets released to the lender each month to make up the gap.

I've been using buydowns a lot more in the past couple of years, and they're one of the smartest tools in the homebuyer's toolkit right now. Especially when sellers are offering concessions — which many are in today's market.

Temporary vs. Permanent Buydowns

There are two categories, and they work very differently:

Temporary Buydowns (2-1 and 1-0)

Temporary buydowns reduce your rate for the first 1-2 years only. After the buydown period ends, you pay the full note rate for the remaining life of the loan. These are the most common type I see.

• 2-1 buydown: Year 1 rate is 2% below the note rate. Year 2 rate is 1% below. Year 3 onward is the full rate.
• 1-0 buydown: Year 1 rate is 1% below the note rate. Year 2 onward is the full rate.

Permanent Buydowns (Points)

A permanent buydown is when you pay "discount points" at closing to reduce your rate for the entire 30-year term. One point equals 1% of the loan amount, and typically buys down the rate by 0.125-0.25%. This is the traditional "paying points" approach. The break-even is usually 4-6 years — if you keep the loan that long, you come out ahead.

The 2-1 Buydown in Detail

The 2-1 buydown is by far the most popular option I'm working with right now. Let me show you exactly how it works with real numbers.

Say you're buying a home with a $400,000 loan at a 6.5% note rate. With a 2-1 buydown:

That's over $9,000 in savings during the first two years. Your payment starts at $2,027 instead of $2,528 — that's $501 less per month in year one. That extra breathing room can make a real difference, especially when you're dealing with the upfront costs of buying a home (furniture, repairs, moving expenses, all the stuff that adds up fast).

Who Pays for the Buydown?

Here's the part that surprises a lot of buyers: you usually don't pay for it yourself. The cost of a 2-1 buydown on a $400,000 loan is typically around $9,000-$10,000 (roughly the total savings amount). That money can come from:

• Seller concessions: The seller agrees to contribute a percentage of the sale price toward the buyer's closing costs, and part of that goes to fund the buydown. This is the most common scenario I see.
• Builder incentives: New construction builders are big fans of buydowns. Instead of dropping the price (which hurts comparable sales for the rest of the development), they fund a buydown.
• Lender credits: Some lenders offer credits that can fund all or part of a buydown.
• The buyer: Yes, you can pay for your own buydown. But in a market where sellers are offering concessions, why would you?

Why Sellers Prefer Buydowns Over Price Reductions

This is something a lot of real estate agents don't realize. A seller who drops the price by $10,000 loses $10,000 from their sale proceeds. A seller who contributes $10,000 toward a buyer's 2-1 buydown also spends $10,000 — but the impact is very different.

A $10,000 price reduction saves the buyer about $50/month on their payment (spread over 30 years). A $10,000 buydown saves the buyer $500/month in year one. The buyer feels the benefit immediately, which means they're more likely to accept the offer and close the deal. Same cost to the seller, much bigger impact on the buyer. That's why I always bring buydowns into the negotiation conversation.

When Does a Buydown Make the Most Sense?

I recommend buydowns most often in these situations:

1. You expect rates to drop. If rates fall in the next 1-2 years and you refinance, you got the benefit of a lower payment AND you kept the unused buydown funds. (Yes — if you refi or pay off the loan early, the remaining buydown escrow is typically refunded to the party that funded it, or in some cases to you.)
2. You're stretching to buy. That first year of homeownership is expensive. A lower payment for 12-24 months gives you room to settle in financially.
3. The seller is offering concessions. If the seller is willing to pay 3-6% of the sale price in concessions, putting some of that toward a buydown is often the best use of the money.
4. You're buying new construction. Builders almost always have incentives available. Ask for a buydown before you ask for upgrades — it's worth more in the long run.

When Does a Buydown NOT Make Sense?

• You plan to sell within a year. You won't get the full benefit of the buydown period.
• Rates are already very low. If your note rate is 4%, a 2-1 buydown starts you at 2%, which has diminishing returns.
• You'd rather buy down the rate permanently. If you're planning to keep the loan for 10+ years, paying points for a permanent rate reduction might save you more over the life of the loan. We can compare both side by side.

Buydown Funds and Refinancing

Here's a detail most people miss: the buydown funds sit in an escrow account. If you refinance or sell the home during the buydown period, the unused portion of those funds doesn't just disappear. Depending on the lender and the agreement, the remaining funds may be credited or refunded. That means a buydown funded by seller concessions could essentially become free money if rates drop and you refi in year one.

This is one of the reasons I've been encouraging buyers to seriously consider 2-1 buydowns in the current market. If rates continue to come down, you get lower payments now AND a refinance opportunity later. If rates stay flat, you still saved thousands in the first two years.

Permanent Buydowns: Paying Points

If you're more interested in reducing your rate for the full 30-year term, you can pay discount points at closing. The standard rule of thumb:

• 1 point = 1% of the loan amount
• Each point typically reduces your rate by 0.125% to 0.25%
• On a $400,000 loan, 1 point costs $4,000

The break-even on paying points is usually 4-6 years. If you plan to stay in the home and keep the loan longer than that, permanent points can save you serious money over time. If you might move or refinance within 3-4 years, the temporary buydown is the better play. I walk through both scenarios with every buyer — it's all about the math for your situation.

Whether you're considering conventional or FHA financing, buydowns can work with most loan types.

Here's What Matters

1. A rate buydown lowers your monthly payment in the first 1-2 years of your mortgage
2. The 2-1 buydown is the most popular: 2% off in year 1, 1% off in year 2, full rate after
3. On a $400K loan at 6.5%, a 2-1 buydown saves roughly $9,000 in the first two years
4. Seller concessions, builder incentives, or lender credits usually fund the buydown — not you
5. If rates drop and you refinance, unused buydown funds may be refunded
6. Buydowns beat price reductions dollar-for-dollar in terms of buyer impact
7. Permanent buydowns (paying points) make sense if you're keeping the loan 5+ years

Buydowns are one of those tools that most buyers don't know about until someone explains them. Now you know. If you want to see what a buydown looks like on your specific deal, schedule a call with me and I'll run the numbers. You can also explore your loan program options to see which product fits best.