Temporary Rate Buydowns: How a 2-1 Buydown Works
A temporary rate buydown lowers a borrower's effective interest rate for an initial period after closing, then steps up to the permanent note rate for the remaining loan term. It's a distinct concept from discount points, which permanently lower the rate for the entire loan term, and understanding the difference matters before assuming either option works the same way. How a 2-1 buydown specifically works The most common structure, a 2-1 buydown, lowers the rate by 2 percentage points in year one, 1 percentage point in year two, and then the loan reverts to its permanent, full note rate starting in year three and for the remaining term. Other structures exist (a 1-0 buydown, a 3-2-1 buydown), following the same general step-up pattern over a shorter or longer initial period. Where the money for the buydown comes from The reduced payments during the buydown period don't disappear — the difference between the reduced payment and the full payment is typically funded up...