2-1 Buydown: How It Works, Costs and When It Pays

What is a 2-1 buydown? Worked example on a $400,000 Texas home

Freddie Mac’s survey put the average 30-year fixed rate at 7.40% on October 15, 2026. For this example we’ll use an illustrative 7.25% note rate. A buyer purchases a $400,000 home in the Dallas-Fort Worth area with 5% down, a $380,000 loan and a 30-year fixed conventional mortgage:

Each month, your servicer draws the difference from the buydown account and adds it to your payment, so the lender always receives the full note-rate payment. Property taxes (about $667 a month at an assumed 2.0% Texas rate), homeowners insurance (about $250 a month) and PMI come on top of these principal-and-interest figures and don’t change with the buydown. Try different rates in Herring’s mortgage payment calculator, or see how much the mortgage is on a $400K house in Texas.

How to calculate a 2-1 buydown cost

1. Calculate the monthly principal and interest at the note rate, the note rate minus 2%, and the note rate minus 1%.
2. Year-one subsidy = (note-rate payment − payment at note rate minus 2%) × 12.
3. Year-two subsidy = (note-rate payment − payment at note rate minus 1%) × 12.
4. Add the two. That total is what the seller or builder deposits at closing.

2-1 vs. 3-2-1 vs. 1-0 buydowns

Fannie Mae allows temporary buydowns of up to 3 percentage points below the note rate, lasting no more than 3 years, with increases of no more than 1% a year (Selling Guide B2-1.4-04). Fannie labels a 2-1 a “moderate” buydown and a 3-2-1 a “significant” one. VA also caps increases at 1% a year. So a 3-2-1 is the deepest standard structure. In this example it costs about twice as much as a 2-1, because the year-one discount is the largest and is paid for an extra year.

Who pays: seller and builder concession limits by loan type

A temporary buydown can be paid for by the seller, the builder, the lender (through a lender credit) or even the buyer. When an interested party such as the seller, builder or a real estate agent pays, the cost counts toward the loan program’s concession limit:

On conventional loans, financing concessions above the limit are treated as sales concessions and deducted from the price, which can push the LTV over the program limit. On VA loans, normal discount points and the buyer’s closing costs don’t count toward the 4%, but a seller-paid temporary buydown does. If the seller is also paying your closing costs, add everything up before you write the offer. Herring’s guide to typical Texas closing costs shows what sellers commonly cover.

You still qualify at the full note rate

Every major program requires you to qualify at the full payment:

• Fannie Mae: the lender must qualify the borrower “based on the note rate without consideration of the bought-down rate.”
• FHA: the lender must use the Note rate when calculating principal and interest.
• VA: lenders base the decision on the full monthly payment, though they may treat the buydown as a compensating factor.

In practice, a buydown lowers your early payments but doesn’t stretch your budget. If you need a lower qualifying payment, a price cut or permanent points will help. A temporary buydown won’t. For how the programs compare more broadly, see FHA vs. conventional loans for Texas homebuyers.

A few program rules matter here. FHA doesn’t allow temporary buydowns on refinances or adjustable-rate loans. Fannie Mae doesn’t allow them on cash-out refinances or investment properties. The note always shows the full rate, and the buydown money must be held in a separate escrow or custodial account.

Temporary buydown vs. permanent discount points

Discount points are prepaid interest that lowers your rate for the life of the loan. One point costs 1% of the loan amount (CFPB). The same $8,957 could buy about 2.4 points on a $380,000 loan. If your lender’s pricing lowered the rate by roughly 0.20% per point, that could bring 7.25% down to about 6.75% for the full 30 years:

Permanent points take about 70 months ($8,957 ÷ $128) to match the buydown. If you expect to refinance or sell within about five years, the 2-1 buydown usually delivers more. If you’ll keep the loan for a long time, points come out ahead. One more consideration: if rates fall and you refinance during the buydown period, Fannie Mae lets the leftover buydown funds be credited toward your payoff or returned as the buydown agreement specifies. Read your agreement before closing.

Is a 2-1 buydown worth it? Buydown vs. price cut

If a seller will give you $8,957 either way, here’s how the options compare:

• A 2-1 buydown is worth it when cash flow in the first two years matters most. That includes paying for move-in costs and furniture, waiting on a raise, or expecting a refinance if rates come down.
• A price cut is worth it when you want a lower loan balance, slightly more equity, and a slightly smaller payment for the life of the loan. It also lowers your LTV, which can reduce PMI. In this example it saves about $58 a month, or about $20,900 over 30 years if you keep the loan that long.
• Permanent points are worth it when you plan to keep the loan for many years and rates are unlikely to drop enough to refinance.
• Be careful if you’re counting on a refinance to escape the year-three payment. Refinancing has its own costs and requires you to qualify again. Budget for the full $2,592 note-rate payment from day one. Our guide to Texas refinance costs shows what a future refinance would cost.

Buydowns on new construction in Texas

Rate incentives are common on new construction in the Texas suburbs, from Collin and Denton counties to the edges of Houston, San Antonio and Austin. A few things to know before you take one:

• Builder incentives often require the builder’s preferred lender. Compare the whole package, including rate, fees and any price concessions you give up. A large incentive paired with a higher note rate or higher fees can cost more than it looks.
• “Forward commitment” rates aren’t the same as a buydown. Some builders buy blocks of below-market rates in advance. Fannie Mae doesn’t count these standby commitments toward the concession limit, because they aren’t tied to one buyer. Ask whether you’re being offered a temporary buydown, a permanent bought-down rate or a forward-commitment rate.
• Get it in writing. Put the incentive amount, its use (buydown, closing costs or price) and any lender condition in the contract, and make sure your financing addendum reflects the loan you’re actually getting.
• Check the concession limits. If the builder pays closing costs and a buydown, the total still has to fit under the 3%, 6% or 9% conventional limit, 6% for FHA or 4% for VA.

Comparing a builder’s offer? Herring can quote a conventional home loan or an FHA loan in Texas so you can see both side by side. If you’re building rather than buying from inventory, see our guide to construction loans.

Herring Bank NMLS #415783 | Member FDIC | Equal Housing Lender. This article is for educational purposes only and does not constitute financial, legal or tax advice. It is not a commitment to lend. Rates, payments and buydown costs shown are examples, not offers. Temporary buydown availability depends on loan program and lender approval. Loan programs, rates and eligibility requirements are subject to change without notice.