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2-1 Buydowns Explained: How Temporary Buydowns Work

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A 2-1 buydown lowers the payment for two years. You still qualify at the full note rate, then the payment steps up.

Published: 2026-10-19

Key takeaways

  • Fannie Mae allows a temporary buydown on fixed-rate loans and certain ARMs for a principal residence or second home. The reduction cannot exceed 3 percentage points, the borrower's rate cannot rise more than 1 point a year, and the period cannot run longer than 3 years.
  • A 2-1 plan is 2 points below the note in year one, 1 point below in year two, then the note rate.
  • Fannie Mae and Freddie Mac both require a fixed-rate borrower to qualify at the note rate, without the bought-down rate.
  • If a seller or another interested party funds the subsidy, Fannie Mae counts that cost toward interested-party contribution limits.
  • If the buydown funds are not available, you still owe the full note payment.

Published: 2026-10-19

A 2-1 buydown is a temporary subsidy that cuts the interest you pay in year one by 2 percentage points and in year two by 1 percentage point. In year three you pay the full note rate, and the note itself never changed.

The subsidy sits in a buydown account and is applied as each payment comes due. The Consumer Financial Protection Bureau says a temporary buydown gives you a lower payment for a limited time, usually one to three years, with the payment rising each year until the buydown ends.

What is a 2-1 buydown?

A 2-1 buydown is one shape of a temporary interest rate buydown. You pay as if the rate were 2 percentage points lower in the first year and 1 percentage point lower in the second year. From the third year on, you pay the note rate.

Fannie Mae Selling Guide B2-1.4-04 (August 7, 2024) says the mortgage instruments must show the permanent payment terms. The buydown plan cannot change the note. Freddie Mac's product page for temporary subsidy buydown plans uses the same outer bounds. The initial rate may not sit more than 3 percentage points below the note rate, and the plan may not run more than 3 years after the first scheduled payment date.

Fannie Mae calls a buydown moderate when the gap is 2 percentage points or less and the period is two years or less. A standard 2-1 plan matches that description. A significant buydown is a gap of more than 2 percentage points, or a period longer than two years, such as a 3-2-1.

Permanent discount points change the note rate for the whole term. A 2-1 buydown leaves the note rate in place and subsidizes two years of payments. Points and APR are covered in how to compare mortgage offers. The tax treatment of points is on the points tax page.

Who funds the subsidy?

Someone puts the subsidy in the account before the payments start. Fannie Mae says the account must be established and fully funded before the lender submits the loan for purchase or securitization. The funds go into a custodial account. They cannot be mixed with the lender's other corporate funds.

The seller, the builder, the lender, or the borrower can fund it. Fannie Mae does not cap the dollar size, but the dollars must match the buydown period. Your only interest in the funds is to have them applied to payments as they come due. The funds are not refundable unless the mortgage is paid off before they are used. The agreement can send leftovers to you or to the lender, if the lender funded the account.

If an interested party pays, Fannie Mae's contribution limits apply. Selling Guide B3-4.1-02 says interested parties include the seller, the builder or developer, the real estate agent or broker, an affiliate of those parties, or anyone who benefits from the highest sale price and can influence the price. A lender or employer is not an interested party unless it is the seller or is affiliated with one.

When an interested party or an affiliated lender pays for a temporary or permanent buydown, that cost goes into the contribution calculation. For a principal residence or second home, the maximum financing concession is 3% when the loan-to-value ratio is above 90%, 6% from 75.01% through 90%, and 9% at 75% or below. The percentage uses the lower of sales price or appraised value. Amounts over the cap are sales concessions and reduce the price used for the loan-to-value ratio. Fannie Mae also says these contributions cannot cover your down payment, reserves, or minimum borrower contribution.

Freddie Mac's product page bars a buydown on a no-cash-out refinance when a lender credit from a higher interest rate funds the plan. Cash-out refinances and investment properties are outside that page's eligible set too.

Why do you qualify at the full note rate?

The note rate is the rate you owe when the subsidy ends, and the rate you owe if the account is empty.

Fannie Mae says the lender must qualify you on the note rate without considering the bought-down rate. Freddie Mac's product page says the same for fixed-rate mortgages: qualify using the payment calculated at the note rate. If reserves are required, Freddie Mac says calculate them at the note rate as well.

The buydown agreement has to say you still owe the note payment if the funds are not available. The year-one draft is not the payment the underwriter uses.

Test the note-rate payment in your budget. The mortgage calculator can show principal and interest at that rate. Year one and year two are smaller only while the subsidy is applied.

How does the payment step up?

The CFPB says the payment increases each year until the buydown ends. On a 2-1 plan the rate you pay rises by 1 percentage point after year one and by another 1 percentage point after year two. Fannie Mae allows more frequent changes only when the increase in a year still does not exceed 1 percentage point.

Worked example, illustrative only. Take a $300,000 loan, a 30-year term, and an illustrative 6% note rate, not a quote. The full principal and interest, from the standard formula rounded to the cent, is $1,798.65 a month. A 2-1 plan sets your rate portion at an illustrative 4% in year one and 5% in year two, then 6% from year three on.

One common way to show the temporary payment is the fully amortizing payment at the bought-down rate, using the original balance and the original term. On that method:

  • Year one at an illustrative 4% is $1,432.25 a month. The account covers $366.40 a month, or $4,396.80 for the year.
  • Year two at an illustrative 5% is $1,610.46 a month. The account covers $188.19 a month, or $2,258.28 for the year.
  • From year three on, at the 6% note rate, the payment is $1,798.65. The subsidy is finished.

From the year-one payment to the note payment, principal and interest rises by $366.40. Taxes, insurance, and mortgage insurance are not in these figures and can move on their own.

Plan for $1,798.65 plus taxes and insurance before you rely on $1,432.25. The note still requires the full payment if you do not sell or refinance, and a later refinance is a new loan, not a term of this one.

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Which loans can use one?

Fannie Mae allows the plan on a principal residence or a second home. Investor properties and cash-out refinances are ineligible. ARMs are restricted, and the guide points those limits to section B2-1.4-02. A fixed-rate loan is the straightforward case.

Freddie Mac's product page allows the plans on a 1-unit primary residence or second home for fixed-rate loans and for 5/6-month, 7/6-month, and 10/6-month ARMs. A 2-unit primary residence has a similar list. A 3-unit or 4-unit primary residence is limited to fixed-rate, 7/6-month, and 10/6-month ARMs. The page bars 3/6-month ARMs, cash-out refinances, investment properties, and Home Possible mortgages on 3-unit or 4-unit properties.

Read the buydown agreement next to the Loan Estimate. Check who funded the account, where leftover funds go if you pay the loan off early, and the month the full payment begins.

Price the full note-rate payment in the mortgage calculator, and treat the first two years as temporary. For the lasting rate trade, use the points and APR comparison and the points tax page.

Seller funds for a buydown follow interested-party rules. Grants and second loans are covered in Down Payment Assistance: Grants, Second Loans, Eligibility.

This article is educational and is not a loan offer or financial advice.

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Frequently asked questions

Does a 2-1 buydown lower my note rate?

No. Fannie Mae says the mortgage instruments must show the permanent payment terms, and the buydown cannot change the note. The subsidy reduces what you pay for a set period. The note rate is what you owe after that, and what you owe if the funds are not there.

Can the seller pay for the buydown?

A seller is a common source. Fannie Mae counts an interested-party subsidy toward the contribution limits. On a principal residence those caps are 3%, 6%, or 9% of the lower of price or value, depending on loan-to-value. The contribution cannot be used as your down payment.

Why was I qualified at a higher payment than month one?

Fannie Mae requires qualification at the note rate without the bought-down rate. Freddie Mac requires the same on fixed-rate loans. The year-one payment is temporary. The underwriter is testing the payment the note requires.

What if I sell during the two years?

Fannie Mae says that if the mortgage is paid in full, remaining funds are credited to the payoff or returned to the borrower or the lender, as the agreement specifies. If the loan is assumed, the funds may keep reducing the payment under the original plan. If the loan is foreclosed, the funds reduce the mortgage debt.

Is a 2-1 buydown the same as paying points?

No. Points are an upfront charge that can permanently reduce the note rate. A 2-1 buydown leaves the note rate in place and subsidizes the payment for two years. Compare a Loan Estimate with the buydown and one without it, including APR and cash to close.