Back to Blog✦ AI Summary
- $400,000 loan amount
- 7.00% note rate, 30-year fixed mortgage
- Principal and interest only
- Property tax, homeowners insurance, mortgage insurance, and HOA excluded
Assumptions used here
- $400,000 loan amount
- 7.00% note rate, 30-year fixed mortgage
- Principal and interest only
- Property tax, homeowners insurance, mortgage insurance, and HOA excluded
🔎 2-1 buydown payment example
2-1 buydown describes a temporary subsidy that leaves the mortgage note rate unchanged while reducing the borrower’s payment basis by 2 percentage points in year one and 1 point in year two. In year three, the borrower pays the full principal-and-interest amount at the note rate. This is different from paying discount points for a permanent rate reduction.
The standard payment formula is principal × monthly rate × (1+monthly rate)^360 ÷ ((1+monthly rate)^360-1). A lender’s rounding and payment-date conventions may create small differences.
✅ First two years calculated
| Period | Payment rate | Monthly P&I | Monthly difference |
|---|---|---|---|
| Year 1 | 5.00% | $2,147.29 | $513.92 lower |
| Year 2 | 6.00% | $2,398.20 | $263.01 lower |
| Years 3 to 30 | 7.00% | $2,661.21 | Baseline |
Try a 2-1 buydown payment example
Illustrative principal and interest only. Edit the values below.
The calculator is unavailable in this view. Refer to the worked example above.
Calculation details and assumptions
Principal and interest only; taxes, insurance, HOA charges and fees are excluded. The note rate and contractual payment do not change: a temporary subsidy covers the modeled payment gap. Loan qualification is assessed separately at the full note rate. Each monthly payment is rounded to cents before calculating the gaps and 12-month totals. Actual terms and required funding may differ. Fannie Mae: temporary interest-rate buydowns.
The approximate subsidy is $6,167.04 in year one and $3,156.12 in year two, or $9,323.16 total. A seller, builder, lender, or other permitted source may fund an account that covers the difference each month. Verify the funding source and treatment of unused funds in the written buydown agreement.
Can the lower payment qualify me for a larger loan?
Do not assume so. Fannie Mae’s temporary buydown guide requires qualification at the note rate, without considering the bought-down rate. Freddie Mac likewise uses note-rate payments for fixed-rate qualification. The structure can ease early cash flow but should not turn an unaffordable home into an affordable one on paper.
Who can pay the buydown cost?
Program rules may permit sellers, builders, or lenders to fund it. When an interested party funds the subsidy, the cost may count toward contribution limits. Review Fannie Mae’s Interested Party Contributions guidance and ask the lender to show the amount on the transaction documents.
What payment should guide my budget?
Use the year-three amount at the note rate, then add property tax, homeowners insurance, mortgage insurance when applicable, and HOA dues. Do not base affordability on an assumed raise or future refinance.
📌 Compare the same seller dollars
| Option | Early cash flow | Longer-term effect |
|---|---|---|
| 2-1 buydown | Lower P&I for two years | Full note-rate P&I in year three |
| Price reduction | May modestly lower payment | Reduces purchase price and principal |
| Permanent points | Reduces interest payment | May favor a longer holding period |
| Closing-cost credit | Reduces cash due initially | Does not lower scheduled P&I |
2-1 buydown FAQ
Q.Does the mortgage rate adjust in year three?
Not in this 30-year fixed example. The note rate remains 7%; only the subsidized share of the payment ends.
Q.Do taxes and insurance fall too?
No. The example covers P&I only. Taxes, insurance, mortgage insurance, and HOA charges can change independently.
Q.Is it always better than a price cut?
No. The result depends on loan size, holding period, rates, contribution limits, and cash needs. Compare options using the same seller cost.
2-1 buydown conclusion
2-1 buydown produces about $9,323 in first-two-year payment differences in this $400,000, 7%, 30-year fixed P&I example. Taxes and insurance are excluded, and qualification may still use the note rate. Compare the year-three total payment with your budget, then price the buydown against a reduction, permanent points, and a closing-cost credit.
Run the payment schedule with your actual loan amount.
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