Everyone in this market has heard the phrase. Far fewer can explain where the money sits, who holds it, or what happens when it runs out. If you are a seller funding one or a buyer receiving one, you should be able to.
Here is the whole mechanism.
The structure in one paragraph
The buyer closes on a normal fixed rate mortgage at the market rate. Call that the note rate, because that is the rate on the note and the rate the loan actually is. Separately, a lump sum is deposited into an escrow account at closing. For the first twelve months, that account pays the difference between the buyer's payment at two points below the note rate and the real payment the lender is owed. For the next twelve months it does the same thing at one point below. At month twenty five the account is empty and the buyer pays the note rate for the remaining life of the loan.
The loan never changes. Only the source of part of the payment changes.
Where the money comes from
The buydown is funded by a lump sum, and that sum is a real cost paid by a real party at closing. It is not created by the lender.
The seller is the most common source in a resale transaction. The funds come out of seller proceeds as a concession, exactly like a closing cost credit, and are subject to the same contribution limits.
A builder funds them routinely on new construction, usually through an affiliated lender, which is why builder advertising leads with a rate.
The buyer can fund their own buydown, though a buyer with cash to spend usually does better comparing that spend against a permanent rate reduction or a larger down payment.
The lender or the agent may contribute in some circumstances, subject to rules that vary and are worth confirming rather than assuming.
What it costs
The cost is roughly the total of the payments being subsidized. Two points off for a year plus one point off for a year is a meaningful number, commonly landing in the low to mid single digit percentages of the loan amount depending on the note rate and the balance.
Here is the part sellers miss: that figure is frequently less than the price reduction they were already contemplating, and it moves the buyer's payment far more. See Seller Concession vs Price Reduction for that comparison.
Year three, and the honest conversation
At month twenty five the subsidy ends and the payment steps up to the note rate. Permanently. Anyone presenting a 2-1 buydown without saying that plainly is setting up a problem.
Three legitimate answers to it:
The buyer qualified at the note rate anyway. On most programs the underwriter tests the buyer against the full note rate payment, not the subsidized one. If they were approved, they were approved at the number they will eventually pay. The buydown is a cash flow cushion in the early years, not a stretch into a house they cannot afford.
The early years are the expensive years. Moving costs, furniture, window coverings, the landscaping the inspection report mentioned. Relief front-loaded into exactly the period when cash is tightest has real value even if nothing changes later.
Refinancing is a possibility, not a plan. If rates fall during the subsidy period, the buyer refinances and the structure did its job. If they do not, the buyer pays the note rate, which they already qualified for. Never sell a buydown as a bet on rates. Sell it as a payment structure that survives rates staying put.
See What Happens When the Buydown Ends for how to handle this objection in a showing.
Mechanics that trip up live files
Unused funds. If the loan pays off during the subsidy period through sale or refinance, the remaining escrow balance is generally applied to the payoff rather than refunded as cash. Terms vary. Read them.
Qualifying rate. Assume the note rate unless the specific program says otherwise. Promising a buyer they will qualify on the reduced rate is the fastest way to lose a deal in underwriting.
Contribution caps. The buydown competes for room with the buyer's other closing cost credits under the same limit. A seller agreeing to both without checking the cap frequently agrees to more than the loan will allow.
Program eligibility. Not every loan program, occupancy type or property type permits a temporary buydown. Confirm before it goes in the contract.
When a 2-1 is the right tool
Reach for it when the property is priced correctly, the buyer qualifies at the note rate, and the obstacle is the first year of cash flow rather than long term affordability. That is a common situation in this market and a 2-1 solves it cleanly.
Reach for something else when the buyer needs the lower rate to qualify at all, when they expect to hold the loan for decades, or when the seller's contribution room is too tight to fund it. Permanent vs Temporary Buydown covers that fork.
Why bring this to us
- We run the numbers before the listing goes live, so the figure in your marketing is a real locked rate rather than a hope.
- Broker model. Multiple investors, which matters when one lender's buydown terms do not fit the file.
- We will sit in the listing appointment with you and explain the structure to the seller directly.
- You talk to the principal. Ricky Khamis is President of EPiQ Lending, NMLS #173141, lending in Arizona since 1999 and a 2025 Presidents Club Winner at CMG Home Loans. Direct line: (480) 999-9842.
EPiQ Lending is NMLS #1936984, at 7975 N. Hayden Road, Suite A-101 in Scottsdale. Verify all of it before you trust any of it: Ricky's EPiQ Lending profile, the Scottsdale branch, and the license itself at NMLS Consumer Access. Hold every lender to that standard, including us.
Send me the address and the price before the next reduction, and I will show you what a concession pointed at the payment does instead.
Equal Housing Opportunity. This is general information, not a commitment to lend or an offer to extend credit. Buydown structures and any figures shown are illustrative, derived from a structure applied to an assumed note rate, and are not an offer or a quote. Actual rates depend on credit approval, loan program, occupancy, loan amount, down payment, property type and market pricing at lock. Seller contribution limits vary by loan type, occupancy and loan-to-value and change over time; confirm current limits against the buyer's specific loan. Rates, terms and program guidelines change and depend on credit approval, property appraisal and other qualifying factors. Not all applicants will qualify.
Looking at a specific home? Send me the address and I will run the numbers: rickykhamis.com/analyze
