2-1 Buydown Calculator
Loan & the buydown
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Know what this estimate is based on
- Jurisdiction
- United States — state and local practice
- Scope and limitations
- Educational estimate only. U.S. real estate costs are local: property tax rates, transfer and recording taxes, title practice, who customarily pays which closing cost, and landlord-tenant rules all change by state and often by county or city. Agent commission is negotiable and, since the 2024 NAR settlement, buyer-agent compensation is negotiated separately rather than assumed. Only a lender's Loan Estimate, a title company's fee sheet or a signed contract binds a number.
- Source links checked
- Jul 30, 2026
Built and regression-tested by Smart Tools Lab. It has not been individually reviewed by a licensed financial, tax, or legal professional.
How to use
- 01
Enter the loan amount, the sale price and the note rate.
- 02
Set the rate reduction in each year — 2 then 1 is the classic structure, hence the name.
- 03
Read the lump sum the seller escrows. That is the concession being negotiated.
- 04
Compare the three payments. Year 3 is the one you have to be able to afford, because the lender qualifies you on it.
- 05
Look at the equivalent price cut — the same seller money spent on price instead, which is a very different amount.
Formula
Each year's payment is the standard amortising payment on the full loan at the note rate less that year's reduction, with every effective rate floored just above zero so a reduction larger than the note rate cannot produce a negative one. The subsidy in a year is twelve times the difference between the full payment and that year's payment, floored at zero. The lump sum the seller escrows is the three yearly subsidies added. The equivalent price cut works backwards: it is the reduction in loan principal that would produce the same first-year payment at the note rate, which assumes the buyer keeps the same cash down so a price cut reduces the loan dollar for dollar. All the rate fields keep their defaults, because a zero note rate or a zero reduction is not an empty field — it describes a different product.
Example
A $336,000 loan on a $420,000 sale at a 6.5% note rate, with a 2-1 buydown over thirty years. Full payment at 6.5%: $2,124. Year 1 at 4.5%: $1,702 — a $422 monthly subsidy, $5,055 for the year. Year 2 at 5.5%: $1,908 — a $216 subsidy, $2,592 for the year. Year 3 onward at 6.5%: $2,124. Lump sum the seller escrows: $7,647. Now the comparison that decides it. To get a $1,702 payment permanently at 6.5%, the loan would have to fall to about $269,348 — a $66,652 price cut, or 15.9% off the asking price. So the seller can hand you $7,647 and give you the same first-year payment a $66,652 discount would produce. That asymmetry is why buydowns became so common when rates rose: they are extraordinarily efficient for the seller and genuinely valuable to a buyer in the first two years. The catch is year three. The payment rises $422 from where you started, and nothing about your income has to have changed for that to hurt. The lender knew this, which is why they qualified you at $2,124 rather than $1,702 — and why the honest question is whether you can afford the third year, not the first.
Definitions
- 2-1 buydown
- A temporary rate reduction of two points in year one and one in year two, funded up front.
- 3-2-1 buydown
- The same structure over three years, common on new construction.
- Note rate
- The permanent rate on the loan, which the payment reverts to and which you are qualified at.
- Buydown escrow
- The account holding the subsidy, drawn down monthly to reduce each payment.
- Seller concession
- Money the seller contributes toward the buyer's costs, capped by loan program.
- Permanent buydown
- Paying points to lower the rate for the life of the loan. More expensive, and permanent.
- Discount point
- One percent of the loan paid up front to lower the rate, typically by around 0.25%.
- Qualifying rate
- The rate a lender underwrites you at — the note rate, never the bought-down one.
- Payment shock
- The jump when the subsidy ends. The reason the year-three figure matters more than year one.
- Equivalent price cut
- The reduction in the loan that would produce the same first-year payment. Usually far larger than the buydown's cost.
- Concession cap
- The maximum seller contribution a loan program allows, commonly 3% to 9%.
- Unused escrow
- Subsidy remaining if you refinance or sell early, normally credited to the loan rather than paid out.
Good to know
Why buydowns appeared when rates rose
The product is old and it became ubiquitous in 2022 and 2023 for a specific reason: it lets a seller deliver a large payment reduction for a small amount of money. Here $7,647 escrowed by the seller produces the same first-year payment as a $66,652 price cut — nearly nine times the cost for the same monthly effect. That asymmetry is why builders in particular lean on buydowns rather than cutting list prices: cutting price damages the comparable sales that support every remaining unit in the development, while a buydown is a closing concession that leaves the price intact. For a buyer the arithmetic runs the other way. A price cut lowers the payment for thirty years and lowers the loan balance permanently; a buydown lowers it for two. Which is better depends almost entirely on how long you keep the loan.
You are qualified at the note rate, always
Every agency and portfolio program underwrites a temporary buydown at the full note rate — $2,124 here, not the $1,702 you will actually pay in year one. This is deliberate and it is the consumer protection at the centre of the product: a buydown cannot be used to qualify for a house you could not otherwise afford. The corollary is that the payment you must be able to carry is the year-three figure. If the year-one payment is what makes the purchase feel comfortable, the buydown has not made the house affordable, it has postponed the question by 24 months. The honest test before signing is whether $2,124 fits the budget today. If it does, the buydown is two years of genuine relief. If it does not, it is a deferred problem with a date on it.
Buydown or points: a question about how long you stay
A temporary buydown and discount points solve the same problem on opposite timescales. Points buy the rate down permanently — typically about 0.25% of rate per point, at 1% of the loan per point — so on a $336,000 loan, two points cost $6,720 and lower the payment for the entire term. A 2-1 buydown costs $7,647 and lowers it for two years, by far more per month. The break-even is the holding period. A buyer certain they will keep the loan for a decade gets more from points; a buyer who expects to refinance within two or three years gets more from the buydown and keeps the near-term cash. In practice the choice is often made for you by who is paying: sellers offer buydowns, buyers buy points, and a seller concession can usually be applied to either.
Concession caps, and what the buydown competes with
Seller contributions are capped by loan program, and the buydown consumes part of that allowance. Conventional loans generally allow 3% of the price with less than 10% down, 6% between 10% and 25%, and 9% above 25% for a primary residence — investment properties are capped at 2%. FHA allows 6%, VA allows 4% of concessions plus normal closing costs, and USDA allows 6%. Here $7,647 is about 1.8% of a $420,000 price, so it fits comfortably in most structures. But it competes with everything else the seller might contribute: closing-cost credits, prepaid escrows, a repair credit, or a rate buydown that is permanent instead of temporary. Deciding which use is worth most is a real optimisation, and it is worth doing with a loan officer before the concession is written into the contract.
Refinancing, selling, and the unused escrow
The subsidy sits in an escrow account and is drawn down monthly. If you refinance or sell before it is exhausted, the remaining balance is generally credited against the loan payoff rather than kept by the lender — which reduces what you owe but does not arrive as cash. Confirm the treatment in writing before closing, because it is worth thousands and the handling is not universal across servicers. This also sharpens the strategic case. The buydown is at its best for a buyer who genuinely expects rates to fall and intends to refinance in year one or two: they capture most of the subsidy, refinance out before the note rate arrives, and any remainder reduces the payoff. It is at its worst for a buyer who plans to stay thirty years, for whom a permanent reduction in price or rate is simply worth more.
Frequently asked questions
What is a 2-1 buydown?
A temporary rate reduction funded up front, usually by the seller. Your rate is two points lower in year one and one point lower in year two, then reverts to the note rate for the rest of the loan. The money sits in an escrow account and subsidises each payment.
Who actually pays for it?
Whoever negotiates it — most often the seller as a concession, sometimes the builder, occasionally the lender. It is a seller credit like any other, which means it competes with a price reduction or a closing-cost credit for the same dollars.
Am I qualified on the reduced payment?
No. Lenders underwrite you at the full note rate, so a buydown never lets you buy more house. It makes the first years easier, which is a real benefit and a different one from affordability.
What happens if I refinance during the buydown?
The unused escrow is generally credited toward your loan rather than kept by the lender. Confirm that in writing before signing — it is worth thousands, and the treatment is not universal.
Is a buydown better than a price reduction?
It depends entirely on how long you keep the loan. On these figures the same year-one payment could be bought with a $66,652 price cut, against $7,647 for the buydown — so the buydown is dramatically cheaper for the seller. For the buyer, the price cut is permanent and the buydown lasts three years.
Then why would a buyer prefer the buydown?
Because it is worth more to them in the near term and because they expect to refinance. If rates fall and you refinance in year two, you captured the subsidy and never faced the note rate. If rates do not fall, you face a payment $422 higher than the one you got used to.
How is it different from paying points?
Points buy the rate down permanently for the life of the loan and cost far more for the same reduction. A buydown is temporary and cheap. Points suit a buyer certain they will stay; a buydown suits one expecting to refinance.
What is a 3-2-1 buydown?
The same idea over three years — three points off, then two, then one. It costs more and is more common on new construction where the builder funds it. Set the third-year reduction under Advanced options to model it.
Does the seller credit have a limit?
Yes. Loan programs cap total seller concessions — commonly 3% to 9% of the price for conventional loans depending on the down payment, 6% for FHA. A buydown competes with closing-cost credits inside that cap.
What happens if I sell during the buydown?
The remaining escrow is usually returned to the loan, reducing the payoff. You do not receive it in cash. It is another reason the buydown is worth less than its face value to a buyer who moves early.
Is the subsidy taxable to me?
No, and the interest paid from the escrow is generally still deductible to you as mortgage interest, since it is treated as your payment. Worth confirming with a tax preparer if the amounts are large.
Should I take one?
If the alternative is nothing, yes — free money is free money. If the alternative is an equivalent price cut, take the price cut unless you are confident you will refinance, because the price cut lowers your payment for thirty years rather than two.