To put it simply, it’s where the seller credits money at the closing in order to give the buyer a lower payment the first two years of the loan.

As an example if today’s rate is 6.5% for a 30y fixed, on a temporary 2/1 buydown the borrower’s payment will be based on a 4.5% rate the first year then a 5.5% rate in year two, the remaining 27 years go back to the 30y rate locked or 6.5% in this scenario. The borrower qualifies at the actual rate which in this example, is 6.5%

Ok, so how much will the seller need to contribute? The seller contributes the difference between the actual payment and the 2/1 buydown payments. Depending on the loan amount it can range from $7K on for smaller loan amounts to around $20K for higher loan amounts. But typically, it’s around 2.25% of the loan amount, give or take.

Well, that depends. If mortgage rates come down after purchase by at least 1 Point and you can refinance with minimal to no cost within two years, the 2-1 Buydown would be a great option. You get to keep the seller money given to you and a lower rate after, that is the best-case scenario.

One option to consider is to take the seller credit and buy down the rate as much as possible. This option will give you a lower payment than the going rate although significantly less in the first two years than with the 2-1 Buydown but in approximately year 3 you will start to save more money.

Another option yet is not to take the seller credit and ask for a lower price. You can buy down the rate on your own and start with a lower payment due to the lower price.

You can also choose to take the seller credit, buy down the rate and use part of the seller credit for closing costs.