A seller- or builder-funded escrow arrangement that lowers the buyer's effective mortgage payment for the first 1–3 years while the note rate stays unchanged.
A temporary buydown is a financing arrangement in which funds are deposited into an escrow account at closing — usually by the seller or builder — to reduce the buyer's effective monthly payment for the first one to three years of the loan. The borrower's note rate never changes; the escrow account covers the difference between the full payment and the reduced payment each month.
Common structures are named for their rate reductions: a 3-2-1 buydown lowers the effective rate by 3% in year one, 2% in year two, and 1% in year three; a 2-1 buydown lowers it 2% then 1%; a 1-1 lowers it 1% for two years; and a 1-0 lowers it 1% for a single year. Borrowers must qualify at the full note rate — the buydown is payment relief, not qualification relief.
Example
On a $400,000 loan at a 6.5% note rate, a 2-1 buydown makes year-one payments act like 4.5% and year-two payments like 5.5%, funded by roughly $9,100 in seller credit.
Also known as
3-2-1 buydown, 2-1 buydown, 1-0 buydown, rate buydown