Rates feel high and Mountain View prices are no joke. If you want to buy now but wish your first two years of payments were lighter, a 2-1 buydown could help. You will learn what a 2-1 buydown is, who can pay for it, how lenders underwrite it, and how it compares with points or a price reduction. You will also see a simple example and a checklist you can use with your lender and agent. Let’s dive in.
2-1 buydown basics
A 2-1 buydown is a temporary payment subsidy on a fixed-rate mortgage. Your principal-and-interest payment is based on a rate that is 2 percentage points lower in year 1 and 1 point lower in year 2. In year 3, your payment returns to the full note rate for the rest of the term.
Example structure: if your note rate is 6.50 percent, you would pay as if the rate were 4.50 percent in year 1, 5.50 percent in year 2, and 6.50 percent in year 3 and beyond.
The goal is to improve near-term affordability and soften payment shock. This gives you time to increase income, build reserves, or refinance if rates fall.
Who pays and how it is set up
The buydown must be funded up front so the lender can apply the subsidy each month during the first two years. Funds can come from the seller, a builder, the lender, you as the buyer, or a grant. The money is usually placed in an escrow or held by the servicer and is applied to cover the difference between the reduced payment and the full note-rate payment.
Your lender will require a written buydown agreement. It will identify who pays, the dollar amount, and how the funds will be applied over time.
Underwriting and qualification
Most lenders underwrite you at the permanent note rate, not the lower temporary payment. This affects your debt-to-income ratio and how much you qualify to borrow. Some lenders may allow qualification using the buydown payment under specific conditions, but that is lender specific. Always confirm with your lender in writing which rate they will use to qualify you.
Program rules and concession limits
Seller-funded buydowns usually count as seller concessions. Conventional loans often limit seller contributions based on your down payment, commonly 3 percent with less than 10 percent down, 6 percent with 10 to 25 percent down, and 9 percent with more than 25 percent down. FHA typically allows seller contributions up to a set percentage that is commonly cited as 6 percent. VA loans have separate rules on what sellers can pay. Jumbo and portfolio programs vary by lender. Always verify limits and guidelines with your lender.
Tax treatment can vary by who pays and how the cost is categorized. Consult a tax professional for your specific situation.
Local context in Mountain View
Mountain View sits in a high-price part of Santa Clara County where large loan amounts make monthly payments very sensitive to rate changes. In this environment, temporary buydowns can help buyers manage early payments.
Builders in Silicon Valley often use incentives like 2-1 buydowns, closing cost help, or upgrades, especially when rates rise or inventory builds. Resale sellers tend to offer buydowns when days on market lengthen or buyer demand softens. In a strong multiple-offer setting, sellers are less likely to offer concessions.
Buydown vs points vs price cut
- 2-1 buydown: Lower payments for two years at a cost that often equals the sum of those first two years of payment subsidies. It can be attractive if you expect income growth, plan to refinance, or want near-term relief.
- Permanent discount points: You pay up front to lower the note rate for the life of the loan. This can be better if you plan to hold the loan long enough to break even on the upfront cost.
- Price reduction: Reduces your loan amount and payment permanently. After a buydown ends, your payment may be higher than if the seller had simply reduced the price instead. Sellers may prefer buydowns because the contract price stays higher.
Think about total cost to whoever pays, program limits on concessions, and what your long-term payment looks like after year 2.
A simple Mountain View example
The numbers below are for illustration only. Your actual terms will vary by lender and market conditions.
Assumptions:
- Price: 1,500,000 dollars
- Down payment: 20 percent
- Loan amount: 1,200,000 dollars
- 30-year fixed note rate: 6.50 percent
- 2-1 buydown: Year 1 at 4.50 percent, Year 2 at 5.50 percent
Monthly principal-and-interest payments, rounded:
- At 6.50 percent: about 7,584 dollars
- Year 1 at 4.50 percent: about 6,082 dollars, savings about 1,502 dollars per month
- Year 2 at 5.50 percent: about 6,814 dollars, savings about 770 dollars per month
Two-year subsidy to fund:
- Year 1 savings: about 18,024 dollars
- Year 2 savings: about 9,240 dollars
- Total nominal subsidy: about 27,264 dollars
Interpretation: if a seller funds the buydown, they would pay about 27,000 dollars up front to lower your first two years of payments while preserving the 1,500,000 dollar price. If you negotiated a similar 27,000 dollar price cut instead, your payment would be lower permanently because your loan amount would be smaller. If you plan to refinance within two years, the 2-1 buydown can be cost-effective compared with paying permanent points.
When a 2-1 buydown fits
- First-time buyer with rising income or future RSUs. You get near-term relief and time to grow into the full payment. Confirm how you will be qualified and plan for year 3.
- Move-up buyer selling a current home. Lower early payments can reduce the risk of double housing costs while you complete your sale.
- Long-term holder, 10 years or more. Permanent points or a price reduction often win. Run the break-even.
- Builder incentive on new construction. Builders often use 2-1 buydowns to make payments feel manageable without cutting prices.
Questions to ask before you decide
- Who is paying the buydown, and how much will it cost?
- Will I be qualified at the note rate or the reduced payment, and can I get that in writing?
- Does this count against my seller-concession limit for my loan type, and how much room will remain for other costs?
- How will the funds be held and applied, and what will the escrow agreement say?
- What is my exact payment in year 1, year 2, and year 3 and beyond, and can I afford the increase?
- Will the buydown affect the appraisal or contract structure?
- What are the potential tax implications for me and the seller, and should I speak with a tax professional?
- If I sell or refinance before the subsidy ends, will any unused funds be handled in a specific way per the agreement?
- For new builds, what are the alternative incentives, like closing cost credits or upgrades, and how do they compare in net benefit?
Common pitfalls to avoid
- Focusing only on the year 1 payment and ignoring the jump in year 3. Build a budget that includes the full note-rate payment.
- Assuming all lenders qualify you using the buydown payment. Most use the note rate. Get confirmation in writing.
- Forgetting concession limits. A seller-funded buydown usually counts toward the program’s cap on contributions.
- Overpaying for a temporary fix when a price cut or permanent points would fit your plans better. Compare all three options side by side.
Next steps
Run side-by-side scenarios with a local lender so you can compare a 2-1 buydown, permanent points, and a price reduction on the same property. Then weigh near-term relief against long-term cost and your plans to refinance or hold. If you want help structuring a smart offer in Mountain View or anywhere in Santa Clara County, reach out to Karin Freiman for calm, data-informed guidance.
FAQs
What is a 2-1 buydown on a mortgage?
- It is a temporary interest-rate subsidy that lowers your principal-and-interest payment by about 2 percentage points in year 1 and 1 point in year 2, then returns to the full note rate in year 3.
Who usually pays for a 2-1 buydown in Silicon Valley?
- The cost can be paid by the seller, a builder, the lender, the buyer, or a grant, and it is funded up front and applied to your payments during the first two years.
How do lenders qualify me if I use a buydown?
- Lenders typically underwrite using the permanent note rate, not the reduced temporary payment, although some may allow exceptions that you must verify with that lender.
Is a 2-1 buydown cheaper than paying points?
- For short-term relief, yes, the upfront cost often equals the two-year subsidy and is usually lower than buying the permanent rate down to the same level, but points can be better if you keep the loan many years.
Do seller-funded buydowns count toward concession limits?
- Yes, they are generally treated as seller concessions and are subject to program limits that vary by loan type and down payment, so confirm with your lender.
Does a 2-1 buydown affect my long-term payment?
- The lower payment is temporary. After two years, your payment rises to the note-rate amount, which may be higher than if you had negotiated a price reduction instead.
