What this calculator does
It shows what you would pay each month during a temporary buydown, when the payment returns to normal, and how much money has to be set aside at closing to make that happen.
A temporary buydown lowers the payment for the first year or few years of a fixed-rate loan without changing the loan itself. The name describes the schedule. In a 2-1 buydown, the year-one payment is figured at a rate 2 percentage points below the note rate (the permanent rate written in your loan's promissory note), year two at 1 point below, and from year three on at the full note rate. A 3-2-1 adds a third reduced year, a 1-1 keeps a 1-point reduction for two years, and a 1-0 lowers the first year only.
Where the money comes from
The rate on the note never changes. Instead, the gap between the full payment and each reduced payment is paid in advance, at closing, into a buydown account, often held in escrow. Each month the servicer takes your reduced payment plus that month's draw from the account, and together they make the full payment. The money usually comes from a seller, a builder or a lender credit, and sometimes from the buyer.
Because the full payment arrives every month, the loan pays down exactly as it would without the buydown. It also makes the cost easy to pin down: it is simply the sum of the monthly gaps across the reduced years.
How the math works
Each reduced payment uses the standard amortization formula on the full loan amount and the full term, with only the rate changed for that year. The payment is not recalculated on a shorter term or a smaller balance.
- Cost
- the subsidy deposited at closing
- M
- monthly payment at the note rate
- Mₖ
- monthly payment in reduced year k, at the note rate minus that year's reduction
- k
- each reduced year: two for a 2-1 or 1-1, three for a 3-2-1, one for a 1-0
Both M and each Mk come from the usual payment formula, P × r(1 + r)n ÷ ((1 + r)n − 1), with P the loan amount, n the full number of payments and r that year's rate divided by 12. A reduced rate never goes below zero here; at 0% the payment is just the loan amount divided by the number of payments.
Worked example
Take a $360,000 loan at a 6.5% note rate over 30 years (360 payments), with a 2-1 buydown.
Worked example
- Full payment at 6.5%: $2,275.44 a month.
- Year 1 at 4.5%: $1,824.07, which is $451.37 a month less. Over 12 months: $5,416.44.
- Year 2 at 5.5%: $2,044.04, which is $231.40 a month less. Over 12 months: $2,776.80.
- Total subsidy: $5,416.44 + $2,776.80 = $8,193.24, or 2.28% of the loan amount.
You pay $1,824.07 a month in year one, $2,044.04 in year two and $2,275.44 from year three on. The buydown account needs $8,193.24 at closing.
Qualifying and the step-ups
Lenders generally qualify you at the full note-rate payment, not the year-one figure, so a buydown usually does not change how much you can borrow. The increases are fixed and known in advance, which sets a buydown apart from an adjustable-rate loan: here the $2,275.44 reached in year three is the highest principal-and-interest payment the loan will ever have.
Temporary buydowns and discount points
Both spend money at closing to lower the payment, on very different schedules. Discount points buy a permanently lower note rate, so the saving lasts as long as you keep the loan and the cost is earned back gradually; the points break-even calculator works out how long that takes. A temporary buydown leaves the note rate alone and concentrates the saving in the first years, after which the account is empty. Comparing them means comparing a short, deep saving with a smaller one that lasts.
Common mistakes
- Budgeting on the year-one payment. The reduced payment is temporary by design. The budget has to carry the full note-rate payment once the buydown ends, along with any change in tax and insurance.
- Thinking the rate itself is lower. The note rate stays the same for the life of the loan, and your loan documents show it. The buydown is a subsidy that covers part of each payment.
- Confusing a buydown with an adjustable rate. A buydown's increases are scheduled and stop at the note-rate payment. An adjustable rate follows an index after its fixed period and can rise above where it started.
- Forgetting that the subsidy is real money. When a seller or builder funds the buydown, that concession could have gone toward the price or closing costs instead, and loan programs may cap seller concessions. The cost shown here puts those options on the same footing.
- Assuming leftover funds come back to you. If you sell or refinance during the reduced years, the unused balance is handled according to the buydown agreement, which is worth reading before closing.
Limits of this estimate
- It covers principal and interest only. Tax, insurance, mortgage insurance and HOA dues are not included and are not reduced by a buydown.
- It assumes a fixed-rate, fully amortizing loan with monthly payments. Buydown rules for other loan types differ.
- Whether a buydown is allowed, which structures are offered, and who may fund it are set by the lender and the loan program.
- The lender's subsidy figure may differ by a few cents because of rounding or the exact method used.
- It does not weigh the buydown against other uses of the same money, such as a lower price or discount points.
Frequently asked questions
What does 2-1 mean in a 2-1 buydown?
The rate used for your payment is 2 percentage points below the note rate in year one and 1 point below in year two. From year three it is the full note rate for the rest of the loan. A 3-2-1 starts 3 points lower and steps up over three years.
Who pays for a temporary buydown?
Whoever funds the buydown account at closing. That is often a seller or builder as a concession, sometimes the lender through a credit, and sometimes the buyer. The cost is the same whoever pays it.
Do I qualify for the loan at the lower rate?
Generally not. Lenders typically qualify borrowers at the full note-rate payment, so the loan is affordable once the buydown ends. Your lender can confirm how it treats your loan.
What happens to unused funds if I sell or refinance early?
It depends on the buydown agreement and the loan program. Unused funds may be credited toward paying off the loan or handled another way, so the agreement is the place to check before closing.
Does my balance go down more slowly during the buydown?
No. The servicer receives the full note-rate payment every month, your share plus the draw from the buydown account, so the loan amortizes on its normal schedule.
Is a temporary buydown the same as buying points?
No. Discount points lower the note rate permanently. A temporary buydown keeps the note rate and subsidizes the first years of payments. The points break-even calculator covers the permanent version.
Next steps: to see what a permanent rate reduction would cost and save, try the points break-even calculator. For a loan whose payment can change after a fixed period, the ARM payment calculator shows the range. The mortgage payment calculator adds tax, insurance and PMI to the full note-rate payment.