A temporary buydown agreement acts like a financial cushion for new homeowners by lowering monthly mortgage payments during the early years of a loan. This arrangement helps buyers transition into homeownership more comfortably by reducing initial housing costs without permanently affecting the loan’s interest rate.

How Does a Temporary Buydown Agreement Work?

At closing, a sum of money—often paid by the seller, builder, or lender—is placed into an escrow account. This fund subsidizes the borrower’s mortgage payments lower than the original interest rate for a specific period, commonly one to three years. While the borrower enjoys reduced payments, the lender uses the escrow funds to receive the full mortgage interest owed.

Common temporary buydown structures include:

  • 2-1 Buydown: The interest rate is reduced by 2% in the first year, 1% in the second year, and returns to the full rate in the third year.
  • 3-2-1 Buydown: The rate decreases by 3% the first year, 2% the second, and 1% the third, returning to the full rate afterward.

Example: A 2-1 Buydown on a $400,000 Mortgage at 7% Interest

  • Standard monthly payment at 7%: $2,661
  • Year 1 (5% rate): $2,147 monthly — saves $514 per month
  • Year 2 (6% rate): $2,398 monthly — saves $263 per month
  • Year 3+: $2,661 monthly (full payment resumes)

The total buydown cost, or subsidy, is about $9,324, typically paid by the seller at closing to lower your payments early on.

Who Benefits from Temporary Buydowns?

Stakeholder Benefit
Homebuyers Reduced initial monthly payments and eased financial transition
Home Sellers Attracts more buyers and facilitates quicker sales without lowering price
Home Builders Marketing advantage for new construction homes Builder Financing
Real Estate Agents Helps close deals in tight or high-interest-rate markets

Key Considerations

  • Qualification Is Based on Full Rate: Lenders require buyers to qualify for the loan based on the original interest rate, not the temporary reduced rate. This ensures you can handle payments after the buydown ends.
  • Unused Funds Apply to Loan Principal: If you refinance or sell early, remaining escrow funds usually apply to your principal balance.
  • Temporary vs. Permanent Buydowns: A temporary buydown only reduces rates briefly, unlike a permanent buydown that lowers the rate for the life of the loan, usually via discount points.

FAQs

Is a temporary buydown the same as an Adjustable-Rate Mortgage (ARM)?
No. A temporary buydown applies a fixed-rate mortgage payment reduction for a set period, while an ARM’s rate can change over time based on the market.

Does a buydown lower the home’s sales price?
No, it’s a financing concession paid separately from the home’s sale price.

Who typically pays for a temporary buydown?
Usually the home seller, builder, or sometimes the lender, as an incentive to help homebuyers afford the mortgage initially.

For more on related financing options, see our Interest Rate Buydown article.

Authoritative Sources

This transparent and flexible financing tool can ease your mortgage journey, especially for first-time buyers or those expecting income growth in the coming years.