A 2-1 buydown is a temporary mortgage rate reduction where your interest rate is reduced by 2% in the first year and 1% in the second year, then returns to the full note rate for the remaining life of the loan.
The money to subsidize those lower payments is deposited into an escrow account at closing, typically paid by the seller, builder, or as a lender credit. It's a powerful tool for reducing your first two years of housing costs while you settle into homeownership.
How the 2-1 Buydown Works Step by Step
- Year 1: Your rate is 2% below the note rate. On a $400K loan at 6.5% note rate, your Year 1 rate is 4.5%. Monthly savings: roughly $460/month.
- Year 2: Your rate is 1% below the note rate. Rate is 5.5%. Monthly savings: roughly $230/month.
- Years 3-30: Full note rate of 6.5%.
- Total savings over 2 years: approximately $8,280.
Who Pays for the 2-1 Buydown?
There are several ways a 2-1 buydown can be funded:
- The seller (common in negotiations)
- The builder (common new construction incentive in San Antonio)
- The buyer through a lender credit (accepts a slightly higher permanent rate)
The cost is typically 1-2% of the loan amount deposited into escrow at closing.
2-1 Buydown vs Permanent Rate Buydown
- 2-1 Buydown:Temporary savings, lower upfront cost, benefit only lasts 2 years
- Permanent points:Permanent savings, higher upfront cost, benefit lasts the life of the loan
Choose 2-1 if you plan to refinance or sell within 2-3 years. Choose permanent points if you plan to stay long-term.
2-1 Buydown in New Construction
San Antonio builders frequently offer 2-1 buydowns as incentives instead of price reductions. This is smart marketing: the builder gets full price on the home, and you get lower payments for 2 years. If you're considering new construction, always ask about rate buydown incentives.
The Math Is a 2-1 Buydown Worth It?
$400K loan, 6.5% note rate with 2-1 buydown:
- Cost of buydown:~$5,600 (paid by seller)
- Year 1 savings:~$5,520
- Year 2 savings:~$2,760
- Total savings:$8,280
- Net benefit if seller pays:+$2,680
- Net benefit if you pay:-$2,680
The key: negotiate for the seller or builder to pay for it.
What Happens in Year 3
Your payment jumps to the full note rate. Make sure you can afford the higher payment. If you're planning to refinance before year 3, the jump doesn't matter. If you're staying, you need to be comfortable with the full payment.