All About Temporary Rate Buydowns

A Temporary Rate buydown is a financing strategy where the interest rate is temporarily reduced for the first few years of a mortgage. This reduction is typically funded by the seller, lender, or agents.

How It Works

3-2-1 Buydown

  • Year 1: 3% below the note rate
  • Year 2: 2% below the note rate
  • Year 3: 1% below the note rate
  • Year 4+: Full note rate applies

Other Buydown Options

  • 2-1 Buydown: 2% reduction in year 1, 1% in year 2, then full rate
  • 1-1 Buydown: 1% reduction for years 1 and 2, then full rate
  • 1-0 Buydown: 1% reduction in year 1, then full rate

Who Pays for the Buydown?

The cost is typically covered by the seller, lender, or real estate agents as a concession. Buyers do not pay for the buydown themselves.

Eligibility

  • Conventional loans: Primary residence or second home
  • FHA and VA loans: Primary residence only

Benefits

  • Lower monthly payments during the first 1–3 years
  • Helps buyers ease into homeownership
  • Can make homes more affordable in a high-rate environment
  • Allows sellers to offer incentives without reducing the purchase price
  • Can utilize excess seller concessions

Example Scenario

  • Loan amount: $350,000
  • Note rate: 5%
  • Monthly principal & interest payment: $1,879

Estimated Payment Reductions

  • Year 1 (3% reduction): ~$1,294
  • Year 2 (2% reduction): ~$1,476
  • Year 3 (1% reduction): ~$1,671
  • Year 4+: $1,879

Estimated total cost to the seller for a 3-2-1 buydown: approximately $14,352.

Important Notes

  • The cost of the buydown decreases with smaller buydown options
  • Standard seller concession limits still apply
  • The buydown is funded through an escrow account, and unused funds are applied to the loan balance if the home is sold or refinanced early
  • Loan documents will reflect the full note rate; a separate agreement outlines the temporary reduced payments

Considerations

  • Lenders can contribute via credits, often offset by a slightly higher interest rate
  • Always have a lender calculate the exact cost of the buydown

How to Structure in a Contract

Seller concessions for a buydown can be written similarly to other concessions:

  • General: Seller to provide credit toward closing costs and prepaids
  • Specific: Seller to provide credit not to exceed a certain amount for the buyer’s interest rate buydown

Exact costs will vary based on the loan amount, rate, and selected buydown option, so it’s best to confirm details with your lender.

Have questions about using a buydown? Contact us to explore how this strategy can help make your purchase more affordable.