3-2-1 vs. 2-1 vs. 1-1 Mortgage Buydowns: Temporary vs. Permanent Explained

3-2-1 vs. 2-1 vs. 1-1 Mortgage Buydowns: Temporary vs. Permanent Explained

A temporary mortgage buydown can be one of the most misunderstood tools in a real estate transaction.

I hear buyers and Realtors say things like:

"Can we buy the rate down?"

"Should we do a 2-1 buydown?"

"What about a 3-2-1?"

"Would it be better to permanently buy the rate down?"

Those are all good questions.

But a temporary mortgage buydown and a permanent interest-rate buydown are two completely different strategies.

So let's make this really simple.

For every example in this article, we're going to use the same purchase:

Purchase Price: $750,000

We'll compare:

5% down - $712,500 loan

and

20% down - $600,000 loan

For illustration purposes, we'll use a 6.75% 30-year fixed note rate.

These examples show principal and interest only. Property taxes, homeowners insurance, HOA dues and mortgage insurance, when applicable, would be additional.

First: What Is a Temporary Mortgage Buydown?

A temporary mortgage buydown reduces the portion of the mortgage payment the buyer is responsible for during the first one, two or three years of the loan.

The important word is:

Temporary.

The actual mortgage note rate does not change.

If the loan is written at 6.75%, the note is still 6.75%.

Instead, money is deposited into a special buydown account at closing.

Each month, part of that money is used to make up the difference between the buyer's temporarily reduced payment and the full payment required by the mortgage.

That is why I like explaining a temporary buydown as:

Someone is essentially prepaying part of your mortgage payment for the first few years.

For many conventional loans, temporary buydowns can last up to three years, with the borrower's effective rate generally increasing no more than 1% per year until it reaches the actual note rate.

And here is something buyers really need to understand:

You generally still qualify using the full note rate - not the temporarily reduced payment.

So a temporary buydown may make the first few years more comfortable, but it does not normally allow someone to qualify based only on the lower introductory payment.

How a 3-2-1 Buydown Works

Let's start with the biggest temporary buydown.

Using our example:

Note Rate: 6.75%

A 3-2-1 buydown would work like this:

Year 1: 3.75% effective payment
Then in Year 2: 4.75% effective payment
By Year 3: 5.75% effective payment
Year 4 and beyond: 6.75% note-rate payment

The mortgage itself was never actually a 3.75% loan.

The borrower simply receives enough subsidy from the buydown account to make the payment feel like a 3.75% payment during Year 1.

Then the subsidy becomes smaller each year.

3-2-1 Buydown Example With 5% Down

On a $750,000 purchase with 5% down:

Loan Amount: $712,500

At the full 6.75% note rate, principal and interest is approximately:

$4,621 per month

With a 3-2-1 buydown:

Year 1 at 3.75%: approximately $3,300/month

Monthly savings: approximately $1,322

Year 2 at 4.75%: approximately $3,717/month

Monthly savings: approximately $905

Year 3 at 5.75%: approximately $4,158/month

Monthly savings: approximately $463

Year 4+: approximately $4,621/month

Approximate total temporary buydown cost:

$32,273

That money has to come from an allowable source under the loan program.

And this is where down payment starts to matter.

Seller Credits Matter

On a standard conventional principal-residence transaction, the allowable seller or interested-party contribution can depend on the loan-to-value ratio.

Using standard Fannie Mae guidelines:

With 5% down, the loan is above 90% LTV.

The maximum financing concession is generally:

3% of the purchase price

On $750,000:

3% = $22,500

Notice the problem.

Our estimated 3-2-1 buydown cost is approximately:

$32,273

But the standard seller-concession limit is only:

$22,500

And that $22,500 may also need to cover other buyer closing costs and prepaid items.

So on this particular conventional example:

A seller-funded 3-2-1 buydown would generally not fit within the standard 3% concession limit.

That is an incredibly important distinction.

Just because a 3-2-1 buydown exists does not mean every buyer can automatically use one.

How a 2-1 Buydown Works

A 2-1 buydown is probably the temporary buydown structure people hear about most often.

Using the same 6.75% note rate:

Year 1: 4.75%
Then in Year 2: 5.75%
Year 3 and beyond: 6.75%

Simple.

2-1 Buydown With 5% Down

Again:

Purchase Price: $750,000

Loan Amount: $712,500

Full 6.75% payment: approximately $4,621/month

Year 1:

4.75% effective payment: approximately $3,717

Savings: approximately $905/month

Year 2:

5.75% effective payment: approximately $4,158

Savings: approximately $463/month

Year 3 and beyond:

6.75% payment: approximately $4,621

Approximate cost of the 2-1 buydown:

$16,414

Now compare that with the maximum 3% seller contribution:

$22,500

That means the temporary buydown itself could fit within that amount in this example.

But remember:

The seller credit may also be needed for other allowable closing costs.

After funding approximately $16,414 for the buydown, roughly:

$6,086

would remain within that 3% limit for other qualifying financing concessions.

That is why we should never look at the buydown by itself.

We need to look at the entire transaction.

What Is a 1-1 Buydown?

A 1-1 temporary buydown is even simpler.

The payment is based on a rate 1% below the note rate during the first year.

Then it moves to the full note-rate payment.

Using our 6.75% example:

Year 1: 5.75%

Year 2 and beyond: 6.75%

With the $712,500 loan:

Year 1 principal and interest would be approximately:

$4,158/month

versus the full payment of:

$4,621/month

Savings:

Approximately $463 per month

Approximate total 1-1 buydown cost:

$5,560

This can be an interesting strategy when a seller is willing to provide some money but there is not enough available for a full 2-1 or 3-2-1 structure.

Now Let's Look at 20% Down

This is where things get interesting.

Same purchase price:

$750,000

But now the buyer puts:

20% down = $150,000

Loan amount:

$600,000

Using the same 6.75% note rate:

Full principal and interest is approximately:

$3,892/month

3-2-1 Buydown With 20% Down

Year 1 at 3.75%:

Approximately $2,779/month

Savings:

Approximately $1,113/month

Year 2 at 4.75%:

Approximately $3,130/month

Savings:

Approximately $762/month

Year 3 at 5.75%:

Approximately $3,501/month

Savings:

Approximately $390/month

Year 4 and beyond at 6.75%:

Approximately $3,892/month

Approximate total 3-2-1 buydown cost:

$27,177

But here is the big difference.

At 80% LTV on a standard conventional principal-residence transaction, the typical maximum financing concession under Fannie Mae guidelines increases to:

6%

On a $750,000 purchase:

6% = $45,000

Now the estimated $27,177 cost of the 3-2-1 buydown can fit inside that maximum.

That would potentially leave approximately:

$17,823

available within the 6% limit for other allowable financing concessions.

That is a completely different conversation than the buyer putting 5% down.

2-1 Buydown With 20% Down

With a $600,000 loan:

Full 6.75% payment: approximately $3,892

Year 1 at 4.75%:

Approximately $3,130

Savings:

Approximately $762/month

Year 2 at 5.75%:

Approximately $3,501

Savings:

Approximately $390/month

Year 3 and beyond:

Approximately $3,892/month

Approximate cost:

$13,822

1-1 Buydown With 20% Down

Year 1 at 5.75%:

Approximately $3,501/month

Savings:

Approximately $390/month

Year 2 and beyond:

Approximately $3,892/month

Approximate cost:

$4,682

Temporary Buydown vs. Permanent Buydown

Now we get to the question I really want buyers to understand.

A temporary buydown and a permanent buydown are not the same thing.

Temporary Buydown

With a temporary buydown:

The actual note rate stays the same.

Our example mortgage is still 6.75%.

Money is placed into a buydown account and used to subsidize part of the payment for a limited period.

Eventually, the borrower pays the full payment associated with 6.75%.

Permanent Buydown

With a permanent buydown:

The actual mortgage interest rate is reduced.

This is typically accomplished by paying discount points at closing.

For example, a borrower may choose to pay additional upfront cost to obtain a lower note rate.

That lower rate then applies for the life of that mortgage unless the borrower later sells the property, refinances or otherwise pays the loan off.

That means a permanent buydown can reduce the payment not just for one or two years - but potentially for as long as the borrower keeps the loan.

One Important Myth About Discount Points

I hear this all the time:

"One point lowers the rate by .25%."

Not necessarily.

A discount point generally represents:

1% of the loan amount

But the amount of interest-rate reduction you receive for paying that point can change.

It depends on the market, lender pricing, loan type, credit profile and other factors.

So there is no universal rule that says:

One point always equals a specific rate reduction.

That is why permanent buydowns need to be priced using actual loan options available at that time.

Which Is Better?

This is where people want me to say:

"Always choose the 2-1."

or

"Always permanently buy down the rate."

I don’t think lending works that way.

The right answer depends on the buyer.

A temporary buydown may make sense when:

The seller is providing the money.

Lower payments during the first few years may be the priority.
The buyer may expect income to increase.
Preserving more cash may matter more than locking in a lower permanent rate.

Or there is a reasonable possibility that rates could improve enough in the future to make refinancing attractive.

But refinancing is never guaranteed.

Rates could go down.

They could stay the same.

They could go up.

So I never want a buyer taking a mortgage they cannot comfortably afford because somebody told them:

"Don’t worry. You’ll just refinance next year."

That is not a strategy.

That is a guess.

When a Permanent Buydown May Make More Sense

A permanent buydown may be worth considering when:

The buyer plans to keep the loan for a long time.

The cost to obtain the lower rate creates an attractive break-even period.

The seller is contributing enough to cover some or all of the points.

The buyer values long-term payment certainty more than short-term savings.

Again, we have to run the numbers.

Seller Credit or Price Reduction?

This is one of my favorite conversations to have with buyers and Realtors.

Imagine a seller is willing to give something up to get a transaction done.

Should the buyer negotiate:

A lower purchase price?

or

Seller-paid closing costs or a rate buydown?

Sometimes a relatively small price reduction barely changes the monthly mortgage payment.

But using those same seller dollars toward a temporary or permanent rate strategy can potentially create a much larger monthly-payment benefit.

That does not mean the buydown is always better.

It means:

Run both scenarios.

You can’t negotiate the bond market.

But you can negotiate the transaction.

If you want a deeper look at how buyers and Realtors can use financing and negotiation strategies in a higher-rate environment, read my article How Buyers and Realtors Can Win in a High Mortgage Rate Market.

The Biggest Mistake Is Looking Only at the Rate

Mortgage strategy is not just:

"What is today’s rate?"

The better questions are:

How much cash do you want to bring to closing?

What monthly payment feels comfortable?

How long do you expect to own the home?
Will you likely keep this mortgage for a long time?
How much is the seller willing to contribute?
Could reducing the purchase price create more value?
Would a temporary buydown create more value?
Or would a permanent buydown create more value?

That is where the real strategy begins.

Same House. Same Price. Completely Different Strategy.

Our $750,000 example shows exactly why this matters.

At 5% down, the buyer has a $712,500 loan and, under standard conventional Fannie Mae guidelines, typically has up to 3% in financing concessions available from an interested party.

At 20% down, the loan drops to $600,000 and that standard maximum increases to 6%.

Suddenly the number of available strategies changes.

That is why I don’t believe in giving every buyer the same answer.

The loan program matters.

The down payment matters.

The seller credit matters.

The payment matters.

And most importantly:

The buyer’s goals matter.

My Advice: Compare the Strategies Side by Side

If you’re buying a home and the seller is willing to provide credits, don’t automatically ask them to "buy the rate down."

First determine what kind of buydown we’re talking about.

Then compare:

3-2-1 temporary buydown

2-1 temporary buydown

1-1 temporary buydown

Permanent rate buydown

Closing-cost credit

Purchase-price reduction

Put the real numbers next to each other.

Then make an educated decision.

That’s how we approach lending.

Give. Guide. Educate.

If you’re a buyer, Realtor or homeowner and want me to run these options side by side for a specific purchase, let’s connect:

https://calendly.com/mortgage_manfro/chat-with-mm

Tim Manfro
Mortgage Manfro | Loan Advisor Group
Give. Guide. Educate.

Examples are for educational purposes only and are based on a hypothetical 30-year fixed mortgage with a 6.75% note rate. Payments shown are principal and interest only and are rounded. Taxes, homeowners insurance, mortgage insurance, HOA dues and other costs are not included. Rates, pricing, discount points, seller-contribution limits, program eligibility and underwriting requirements can change and vary by loan program, property, occupancy, borrower qualifications and lender. Temporary buydowns do not change the mortgage note rate, and refinancing in the future is never guaranteed.