Mortgage Rate Buydowns Explained: What 1-0, 2-1 and 3-2-1 Mean for Richmond, VA Buyers
If you've been house hunting around Richmond lately, you've probably noticed the same thing we hear in almost every buyer conversation: the monthly payment looks very different than it did a couple of years ago. Higher interest rates will do that.
Somewhere along the way, your agent, your lender, or a video on social media may have mentioned a "buydown." It's one of the tools that can take some pressure off the payment, at least for a while. It's also a little complicated, so I want to walk through it the way I would at the kitchen table.
In the video above, Heather goes through the four types. This guide goes a step further: what each one does to your payment, who usually pays for it, and what to ask your lender before you count on one.
THE SHORT ANSWER A mortgage rate buydown lowers your interest rate, and your monthly payment, for the first one to three years of your loan. After that, the payment returns to the full rate on your loan. Someone, often the seller, pays the lender up front to make that happen. The four common versions are 1-0, 1-1, 2-1 and 3-2-1. |
Why are we hearing about buydowns more often?
When rates go up, the payment on the same house goes up with them, and some buyers decide to pause. Sellers and builders who want to keep deals moving look for ways to help, and a buydown lets them help with the payment without lowering the price. Lately we've also started to see sellers put credits on the table up front that a buyer can decide how to use.
How common this is varies from home to home and from one price range to another, so don't assume a particular seller will offer one. But it's worth asking about, and it's worth understanding before the offer is written rather than after.
What is a mortgage rate buydown?
A buydown is a way of paying some money up front so your payment is lower for a while. The money typically goes into an account at closing, and each month the lender draws from it to cover the difference between the payment at the lower rate and the payment at your actual rate.
Your loan is still written at one fixed interest rate, called the note rate. A temporary buydown doesn't change that rate. It only changes what you pay during the first few years, which is why these are called temporary buydowns.
What are the four types of buydowns?
The numbers describe how many percentage points your rate is lowered in each year. Here are the four versions we hear about most.
Type | Year 1 | Year 2 | Year 3 | Year 4 and after |
1-0 | 1 point lower | Full rate | Full rate | Full rate |
1-1 | 1 point lower | 1 point lower | Full rate | Full rate |
2-1 | 2 points lower | 1 point lower | Full rate | Full rate |
3-2-1 | 3 points lower | 2 points lower | 1 point lower | Full rate |
So on a loan with a 7% note rate, a 2-1 buydown would have you paying as if your rate were 5% in year one and 6% in year two, then 7% from year three on.
Not every lender offers every version, and some loan programs limit how deep a buydown can go. It's worth asking early which ones are available for your loan.
What does a buydown do to the monthly payment?
Here's an example. These are made-up numbers, not a quote and not today's rate: a $400,000 loan on a 30-year fixed at a 7% note rate. The payments shown are principal and interest only. Taxes and insurance are extra.
Type | Year 1 | Year 2 | Year 3 | Year 4 and after | Approx. buydown cost |
No buydown | $2,661 | $2,661 | $2,661 | $2,661 | None |
1-0 | $2,398 | $2,661 | $2,661 | $2,661 | About $3,156 |
1-1 | $2,398 | $2,398 | $2,661 | $2,661 | About $6,312 |
2-1 | $2,147 | $2,398 | $2,661 | $2,661 | About $9,323 |
3-2-1 | $1,910 | $2,147 | $2,398 | $2,661 | About $18,342 |
The last column is the cost: the total of the monthly differences that the buydown money has to cover. Your lender will price it for your actual loan, and there can be fees on top, so treat these as rough math rather than a quote.
Look at the 3-2-1 row. The payment in year one is about $750 a month lower, but by year four it's right back at the full amount. That step up is the part I want every buyer to plan for.
What happens when the buydown ends?
The payment steps up on the schedule of the buydown you chose. With a 1-0, that happens after year one. With a 3-2-1, it steps up after year one, again after year two, and again after year three, when you reach the full payment.
Nothing new has to be approved at that point, because you were qualified at the full rate from the start. The real question is whether your budget is ready for each step. Some buyers plan around an expected raise, and some plan around a refinance. A raise is more in your control than rates are, so we're careful about leaning on a refinance. If you can, set aside part of the monthly savings during the buydown years so the step up isn't a surprise.
Who pays for a buydown?
Temporary buydowns are often paid for by the seller or a builder as part of the deal. Sometimes the buyer pays, and some lenders have their own versions depending on the loan program. On certain loan types the rules about who is allowed to fund it are stricter, so your lender needs to confirm what applies.
Lately we've started to see sellers offer credits up front that a buyer could possibly put toward a buydown. If you're the buyer, that can be something to negotiate. Whether a buydown is a better use of that money than a lower price or help with closing costs depends on your numbers, so it's worth running both with your lender.
Is a buydown the same as paying points?
No, though people mix them up. Discount points are a permanent way to lower your rate: you pay a fee at closing and the lower rate lasts for the life of the loan. A temporary buydown lowers your payment for the first few years and then goes away. Points are usually paid by the buyer, while temporary buydowns are more often funded by the seller or builder.
There's one more practical difference. Because points change the actual rate, a lender may be able to count the lower payment when figuring out how much you qualify for. A temporary buydown generally doesn't work that way.
Will a buydown help me qualify for a bigger loan?
Generally, no. Lenders qualify you using the full note rate, not the reduced rate. A buydown helps with your cash flow after you've been approved, but it doesn't change what you're approved for. That's one more reason to talk with a lender before you start shopping rather than after.
How much can a seller contribute toward a buydown?
Seller contributions toward a buyer's costs have limits, and the limit depends on the loan type and, for conventional loans, how much you put down. As we understand the current guidelines, a conventional loan typically allows 3% of the purchase price with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down. FHA and VA loans have their own limits.
Seller-paid buydown money counts toward that limit along with any other closing cost help. That's one reason the deeper buydowns, like a 3-2-1, don't fit every deal: they can cost more than the limit allows. In Virginia, a seller contribution is written into the sales contract, so the amount and what it can be used for follow the contract and your lender's rules. Your lender will tell you exactly what applies to your loan.
When might a buydown make sense, and when might it not?
Every situation is different, but this is how we think it through with buyers.
It may make sense when:
You expect your income to grow over the next few years, so the higher payment later is more comfortable.
You want some room in the budget during the first year or two, when moving and settling in often cost more than people plan for.
The seller is already willing to put money toward your costs, and a buydown is the best use of it for you.
It may not make sense when:
Your budget only works at the lower payment. The payment steps up on schedule no matter what rates do.
The same seller money could do more somewhere else, such as a lower price, closing costs, or repairs.
You'd be counting on a refinance later. Rates may come down, and they may not, and a refinance isn't guaranteed.
What should I ask my lender about a buydown?
Take this list with you. And don't be afraid to shop around. Banks and lenders have different programs, so it's worth getting more than one answer.
Which buydown options do you offer for my loan type, and which don't you offer?
What is the total cost, and are there any lender fees on top of the buydown funds?
Who is allowed to pay for it on my loan?
How does it count toward the seller contribution limit on my loan?
What will my payment be in each year, including when it returns to the full note rate?
What happens to any unused buydown money if I refinance or sell early?
How does this compare with using the same money for points or a lower price?
THE PRACTICAL LESSON Before you count on a buydown, look at the payment in the year it returns to the full note rate. If that payment fits your budget, a buydown can be a helpful bridge. If it doesn't, we'd want to talk about other options first, and ask your lender for each year's payment in writing. |
Key Takeaways
A temporary buydown lowers your payment for the first one to three years. Your note rate doesn't change.
The numbers in 1-0, 1-1, 2-1 and 3-2-1 are the percentage points your rate is lowered in each year.
Buydowns are often paid for by the seller or builder, and that money counts toward the seller contribution limit.
Lenders qualify you at the full note rate, so a buydown generally won't increase what you can borrow.
Ask your lender for the total cost and each year's payment in writing, and compare more than one lender.
Frequently Asked Questions
What is a mortgage rate buydown?
A mortgage rate buydown is money paid up front, usually at closing, to lower your interest rate and monthly payment for a period of time. With a temporary buydown, the lower payment lasts one to three years and then returns to the payment at your full note rate. A permanent buydown uses discount points to lower the rate for the whole loan.
What is the difference between a 1-0, 1-1, 2-1 and 3-2-1 buydown?
The numbers show how many percentage points the rate is lowered in each year. A 1-0 lowers it 1 point in year one only. A 1-1 lowers it 1 point in years one and two. A 2-1 lowers it 2 points in year one and 1 point in year two, and a 3-2-1 lowers it 3, 2 and 1 points over three years.
Does a buydown lower my interest rate for the whole loan?
No. A temporary buydown lowers your payment for the first one to three years, then your payment returns to the amount based on your note rate. Your loan is still written at that one fixed rate. If you want a lower rate for the life of the loan, that's what discount points are for.
Who pays for a buydown?
Often the seller or builder pays, as part of the deal. Sometimes the buyer pays, and some lenders offer their own versions depending on the loan program. The rules about who can fund it vary by loan type, so ask your lender who is allowed to pay on yours.
Can I ask a seller to pay for a buydown in Richmond, VA?
Yes, you can ask. In Virginia, a seller contribution is written into the sales contract, and the amount follows the contract and your lender's limits. Whether a seller agrees depends on the home, the price and how much room there is to negotiate, so it's a good conversation to have with your agent and lender before you write the offer.
What happens to my payment when the buydown ends?
Your payment steps up to the amount based on your full note rate, on the schedule of the buydown you chose. With a 2-1 buydown, for example, it steps up after year one and again after year two. That's why we suggest looking at the full-rate payment before you decide.
Will a buydown help me qualify for a larger loan?
Generally, no. Lenders qualify you using the full note rate, not the reduced buydown rate. The buydown helps with your payment after you're approved, but it doesn't increase what you're approved for.
Is a buydown better than paying discount points?
They're different tools, and which is better depends on your numbers and how long you expect to keep the loan. A temporary buydown gives you lower payments in the early years. Points lower your rate permanently, but you usually pay for them yourself. Ask your lender to show you both side by side.
Can I use a buydown on any type of loan?
Not always. Temporary buydowns are commonly offered on conventional, FHA and VA purchase loans with a fixed rate, but each lender sets its own options, and they generally aren't allowed on investment properties. Ask your lender which versions they offer for your loan.
What should I ask my lender about a buydown?
Ask which options they offer for your loan, the total cost and any fees, who is allowed to pay, how it counts toward the seller contribution limit, and what your payment will be in each year. Also ask what happens to unused funds if you refinance or sell early. And talk to more than one lender, because programs differ.
Keep Learning
Related buyer guides
More answers for Richmond buyers
Ready to Talk About Buying in Richmond?
If you're planning to buy in Richmond and want to make sure you're not just chasing a lower payment, but choosing a plan that still works after the buydown ends, book a strategy call. I'd be glad to help you build a smart plan from the start.
Curt Reichstetter
Two Dog Realty
804-370-1210
curt@curtsellsrva.com
General information only, not a loan offer, legal advice or financial advice. Your lender confirms what is available for your loan.
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