What does a 2-1 or 1-0 buydown cost?
A temporary buydown costs the difference between the full payment and the lower payments for the years it covers, paid up front at closing and set aside to fill the gap each month. On a $400,000 loan at a 6.5% note rate, a 2-1 buydown lowers the payment to $2,026.74 in year one and $2,271.16 in year two and costs $9,103.68; a 1-0 buydown costs $3,085.32.
Put in your loan and rate below to see the payment each year and the amount that has to be set aside.
Cost of the buydown
$9,103.68
2.28% of the loan amount, set aside at closing
- Year 1 at 4.5%
- $2,026.74 / mo
- Year 2 at 5.5%
- $2,271.16 / mo
- Year 3 on, at 6.5%
- $2,528.27 / mo
- Year 1: $501.53 less a month, times 12
- $6,018.36
- Year 2: $257.11 less a month, times 12
- $3,085.32
- Total set aside
- $9,103.68
A worked example
At 6.5% over 30 years, the full principal and interest payment on $400,000 is $2,528.27. In a 2-1 buydown, year one is figured at 4.5%, a payment of $2,026.74, which is $501.53 less. Twelve months of that is $6,018.36. Year two at 5.5% is $2,271.16, $257.11 less, or $3,085.32 for the year.
$6,018.36 + $3,085.32 = $9,103.68, about 2.28% of the loan amount. A 1-0 buydown is only the first year at 5.5%: $3,085.32.
How the cost is figured
Each year’s lower payment is the payment at the reduced rate on the full loan and full term, and the cost is the difference from the note-rate payment, month by month. The exact amount on your loan is set by the lender’s buydown agreement.
Questions people ask
Who pays for a temporary buydown?
The seller, a builder or another party to the sale, or the lender. The plan is a written agreement between whoever provides the money and you. When the seller or another party to the sale pays, it counts toward the limit on what those parties can contribute, according to the Fannie Mae Selling Guide (B2-1.4-04).
Do I qualify at the lower rate?
No. The lender qualifies you at the note rate, the permanent one, not the bought-down rate. Fannie Mae requires it (B2-1.4-04), and FHA requires the note rate for principal and interest when a temporary buydown is involved (HUD Handbook 4000.1, II.A.4 and II.A.5).
Does the note rate change after the buydown ends?
The note rate never changes. The mortgage is written at the permanent rate, and the buydown only pays part of each payment for the first years. Once it ends, the payment is the same as on a loan with no buydown. In the example, the payment is $2,528.27 from year 3 on.
What happens to the money if I sell or refinance early?
The money sits in a custodial account and is paid toward each payment as it comes due. If the loan is paid off before it is used up, the buydown agreement can provide for the rest to go back to you, or to the lender if the lender paid for it (Fannie Mae B2-1.4-04). Read your agreement for what yours says.
Which loans allow a temporary buydown?
Under Fannie Mae’s guide, fixed-rate loans and some adjustable-rate loans on a home you live in or a second home; not investment properties and not cash-out refinances. The rate can rise no more than 1 percentage point a year, over no more than 3 years. FHA does not permit temporary buydowns on refinances (HUD Handbook 4000.1, II.A.8.d).
How is this different from paying points?
Points, a permanent buydown, lower the note rate for the life of the loan. A temporary buydown lowers only the payment, and only for the first year or two. Rate & Best Fit shows what points cost and save on your loan.
Your next step
See rate options for the loan in Rate & Best Fit
A temporary buydown is not in the online pricing tool. The loan itself is, and for a buydown on your purchase, call me. You can call me at (843) 765-0000 or schedule an appointment when you are ready or if you have questions.
Educational information, not a loan approval or commitment to lend. A calculator works out what you type into it; it does not approve or deny anyone, and your own figures come from your Loan Estimate. Jeff Moran, NMLS #483943, through C2 Financial Corporation, NMLS #135622. Equal Housing Opportunity.