How the payment steps work
Two temporary schedules. One permanent note rate.
Each reduction below describes the rate used to calculate the temporary principal-and-interest payment. Taxes, insurance, mortgage insurance, and HOA dues are separate and may change.
Payment period2-1 buydown3-2-1 buydown
Year 1Note rate − 2 pointsNote rate − 3 points
Year 2Note rate − 1 pointNote rate − 2 points
Year 3Full note rateNote rate − 1 point
After the buydownFull note rateFull note rate
Important: the loan documents reflect the permanent note terms. Eligible buydown funds make up the scheduled difference during the temporary period.
2 yearsA 2-1 plan reduces the payment calculation for years one and two
3 yearsA 3-2-1 plan creates three annual payment steps before the full payment
Same noteThe mortgage note rate and permanent loan terms do not change
Plan aheadUnderwriting and your budget should account for the full payment
Where does the temporary payment reduction come from?
A temporary buydown is funded up front. Depending on the program and transaction, the contribution may come from a seller, builder, lender, or another permitted source. The funds are placed in a custodial account and applied toward the scheduled payment difference as it comes due.
The buydown is not a promise that rates will fall or that refinancing will be available later. A sound plan must work if the borrower keeps the original mortgage and reaches the full note-rate payment.
When can a 2-1 or 3-2-1 buydown make sense?
- A seller or builder is offering an eligible credit and the buyer values lower initial payments.
- The buyer expects near-term income growth but can already qualify for and carry the full payment.
- The payment steps leave enough room for property taxes, insurance, maintenance, HOA charges, and savings.
- The buyer has compared the temporary buydown with closing-cost credits, a permanent rate buydown, a price reduction, and keeping more cash in reserve.
It may be a poor fit when the full payment would strain the budget, the contribution would be more valuable elsewhere, or the decision depends on a future refinance that may not be available.
How to compare a seller credit
Temporary buydown
Uses eligible funds to reduce scheduled payments for a limited period. The full note-rate payment still arrives.
Permanent discount points
Uses funds to obtain a lower note rate for the loan term. Compare the upfront cost with the time needed to recover it.
Closing-cost credit
May reduce the buyer's cash needed at closing, subject to program limits and eligible-cost rules.
Price reduction
Reduces the purchase price, but the monthly-payment effect may be smaller than buyers expect. Compare actual numbers.
Questions to answer before accepting a buydown
- What is the note rate and the full principal-and-interest payment?
- What will the complete housing payment be in every year, including taxes and insurance?
- Who is funding the buydown, and does the contribution fit the selected program?
- How much does the buydown cost compared with other uses of the same credit?
- What does the written agreement say about unused funds after a sale or refinance?
- Would the mortgage still fit if rates do not fall and refinancing never becomes attractive?
Current agency guidance
Fannie Mae permits qualifying temporary buydowns on eligible fixed-rate mortgages and certain adjustable-rate plans for principal residences and second homes. Its guidance limits the buydown period to three years, limits annual payment-rate increases, and requires qualification using the note rate. Investor properties and cash-out refinances are not eligible under this specific Fannie Mae policy. Other loan programs and lenders can apply different rules.
Review the current Fannie Mae temporary buydown guidance and the CFPB explanation of points and lender credits. Denver Lending will confirm the requirements for the actual loan being considered.
Temporary buydown questions
Answers before you write the offer.
What is a 2-1 mortgage buydown?+
A 2-1 temporary buydown uses eligible funds contributed at closing to reduce the borrower's scheduled principal-and-interest payment for two years. The first-year payment is calculated using a rate two percentage points below the note rate, the second-year payment uses one percentage point below the note rate, and the full note-rate payment begins in year three. The mortgage note rate itself does not change.
What is a 3-2-1 mortgage buydown?+
A 3-2-1 temporary buydown steps the scheduled principal-and-interest payment up over three years. The payment is calculated using a rate three percentage points below the note rate in year one, two points below in year two, one point below in year three, and the full note rate beginning in year four. Program rules and availability vary.
Does a temporary buydown change the mortgage rate?+
No. A temporary buydown does not change the interest rate written in the mortgage note. Funds placed in a buydown account cover the difference between the temporary payment and the payment required by the note during the buydown period.
Who can pay for a temporary mortgage buydown?+
Depending on the loan program and transaction, eligible buydown funds may come from a seller, builder, lender, or another permitted source. Contribution limits, documentation, and underwriting rules apply, so the funding structure should be confirmed before it is written into a purchase contract.
Do I qualify using the lower bought-down payment?+
Do not assume so. For Fannie Mae loans with a temporary buydown, the borrower must qualify using the full note rate without considering the bought-down rate. Other programs may apply their own requirements. Denver Lending will show both the temporary payment schedule and the full payment used for the applicable qualification review.
What happens to unused buydown funds if I sell or refinance?+
The written buydown agreement controls what happens. Under Fannie Mae guidance, when the mortgage is paid in full, remaining funds may be credited toward the payoff or returned to the borrower or lender as the agreement specifies. Review this provision before closing rather than assuming the funds will be refunded directly to you.
Is a temporary buydown better than paying discount points?+
Not automatically. A temporary buydown reduces scheduled payments only during the initial period. Discount points may reduce the note rate for the life of the loan. The better use of available funds depends on the upfront cost, expected time in the home and loan, likely refinance plans, monthly budget, and cash reserves.
