A temporary buydown is a subsidy attached to an ordinary fixed-rate loan. The note is written at the note rate, and the full payment at that rate is what the borrower owes for the life of the loan. At closing, someone deposits a lump sum into a buydown account held by the servicer. For the first year or two, the borrower pays a lower amount, and each month the servicer takes the difference from the buydown account to make up the full payment. When the account runs out on schedule, the borrower pays the full amount.
The note rate was never the bought-down rate. The lower payment in the early years is the same loan being partly paid by someone else.
A 2-1 buydown is lower in year one, higher in year two, and at the note rate after that. The names describe how far below the note rate the effective rate sits in each year: two points below in the first year, one point below in the second. A 1-0 buydown lasts one year. Some programs allow a 3-2-1 or other schedules. The program and investor decide which structures are allowed.
The amount of the subsidy is calculated precisely. For each month of the buydown period, the lender computes the full principal-and-interest payment at the note rate and the reduced payment at the bought-down rate. The difference, added up across every month in the period, is the amount that has to be deposited at closing. This article does not show a payment or a subsidy amount, because both depend on a real rate and a real loan amount.
The subsidy can be paid by the seller, the builder, the lender, or the borrower, under the program's rules. Builders in new-construction communities around Fort Worth often offer buydowns as an incentive. In a resale, a seller may agree to fund one instead of cutting the price.
If an interested party pays the subsidy, the cost counts against that program's concession cap. Fannie Mae includes the cost of a temporary or permanent buydown funded by an interested party in the interested-party contribution. Source: Fannie Mae Selling Guide B3-4.1-02.
HUD Handbook 4000.1 caps interested-party contributions at 6 percent of the sales price, and that cap includes permanent and temporary buydowns. Source: HUD Handbook 4000.1, Interested Party Contributions.
That matters because a seller credit for closing costs and a buydown both come out of the same allowance. A seller who agrees to pay closing costs and fund a buydown may exceed the cap, and anything over has to come off.
The payment used to qualify is a separate guideline question. Do not assume the underwriter uses the lowest first-year payment.
Fannie Mae requires the borrower to qualify at the note rate on a temporary buydown, so the bought-down payment does not help the borrower qualify. Other programs set their own rule in their guides. The practical result is that a temporary buydown generally makes the early years more affordable without making the borrower eligible for a larger loan. A buyer who can only qualify at the bought-down payment does not qualify.
That design protects the borrower. The full payment is coming, and the underwriter has to see that the borrower can handle it from the start.
The buydown is documented in a buydown agreement that names who funded it, the schedule, the reduced payments, and what happens to unused funds if the loan is paid off early. The Closing Disclosure shows the buydown funds and who paid them, and the loan's terms on page one show the note rate.
During the buydown period, the borrower's statement shows the reduced amount due. When the period ends, the payment steps up, and the servicer sends notice. Escrow for taxes and insurance is separate and adjusts after each annual escrow analysis regardless of the buydown.
If the borrower sells or refinances before the buydown period ends, the buydown agreement controls what happens to the money left in the account. It is commonly credited toward the payoff.
A buydown, discount points, and an ARM each change the payment in a different way.
A buydown steps up on a schedule funded at closing, and the borrower knows every future payment on day one.
Fictional example: a builder offers a buydown instead of a price cut. The useful page shows the note-rate payment, the cost of the subsidy, and whether that cost still fits inside the concession cap after the other seller-paid items. This article does not show a payment.
Three ways a seller's money can be used:
The right comparison uses the same dollars from the seller and looks at what each option does to the payment in year one, year three, and the years after.
On a resale, the buydown has to be part of the deal on paper. In the TREC one-to-four family contract, a seller's contribution toward the buyer's costs is written in the settlement expenses paragraph as a dollar amount, and a buydown is one of the buyer expenses that money can pay when the lender allows it. Builders use their own contracts, and the incentive section usually spells out whether the builder's money can go to a buydown, closing costs, or a price reduction, and whether the builder requires its affiliated lender for the incentive. The loan officer then confirms the dollar amount covers the calculated subsidy at the actual note rate and loan amount, since the subsidy changes if the rate or loan amount changes before closing. Writing the contribution as a dollar amount with flexibility in how it is applied tends to hold up better than naming one specific use.
Buyers sometimes hear that a buydown gets them through the first years until they can refinance to a lower rate. That can happen if rates fall, but it is a plan that depends on future rates, the borrower's file at that time, and the cost of the refinance. The borrower should be comfortable with the full note-rate payment as if no refinance will come. If a refinance does happen during the buydown period, the unused buydown money is handled under the agreement.
A buydown subsidizes an ordinary fixed-rate mortgage. It is not an adjustable-rate mortgage, where future payments depend on an index. On new homes, see new construction for how builder incentives and affiliated lender offers are usually written.
If a builder or seller is offering money toward a buydown, send me the offer and I will compare it with a price cut and permanent points using the same dollars, at your full note-rate payment. Book a call, or start an application.
Links checked Oct 21, 2026.
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026