A temporary rate buydown reduces your monthly payment for the first few years of a mortgage by subsidizing the interest rate, then steps up to the full note rate. Builders and sellers often offer them as incentives, but borrowers can fund them too. Understanding the mechanics—who pays, how the money is held, and what happens if you leave early—helps you evaluate whether a buydown fits your situation.
Common buydown structures
The most common structures are 2-1, 1-0, and 3-2-1. In a 2-1 buydown, your rate is reduced by two percentage points in year one and one point in year two, then rises to the full note rate in year three. A 1-0 buydown reduces the rate by one point in year one only. A 3-2-1 buydown follows the same pattern over three years: three points below in year one, two points below in year two, one point below in year three, then the full rate. These figures are illustrative; rates and products are subject to change and this is not a commitment to lend.
The subsidy amount is the difference between what you actually pay each month and what the full note-rate payment would be. That total is calculated at closing and deposited into a custodial account, often held by the servicer or an escrow agent.
Who can fund the subsidy
The buydown subsidy can come from four sources: the seller, the builder, a lender credit, or the borrower's own funds. Seller and builder contributions are common in slow markets or new construction. Lender credits may be available depending on the loan program and rate environment. Borrowers can also choose to pay the subsidy themselves, trading upfront cash for lower payments in the early years. Regardless of the source, the funds are placed in the custodial account at closing and drawn down monthly to cover the rate difference.
How the custodial account works
Each month during the buydown period, the servicer withdraws the subsidy amount from the account and applies it to your payment, so you only owe the reduced amount. The note rate—and the payment the investor expects—remains unchanged; the subsidy simply fills the gap. Once the buydown period ends, the account is exhausted and you begin paying the full note-rate payment.
What happens if you refinance or sell early
Buydown funds are typically not refundable to the borrower if the loan pays off early. When you refinance or sell before the buydown period ends, any remaining subsidy usually stays with the investor or is returned to the original contributor, depending on the program and note terms. This is a key distinction from purchasing permanent discount points, where you lower the rate for the loan's entire life. With a temporary buydown, you receive the benefit only while you hold the loan during the buydown window.
The Alliance take
Temporary buydowns can ease your budget in the early years, especially if someone else is funding the subsidy. Just remember that the payment will step up, so plan your cash flow accordingly. Buydown availability and refund terms vary by loan program and investor, so review the details with your loan officer before committing. If a buydown makes sense for your timeline and a lower early payment helps you qualify or preserve cash, it's worth exploring. Start an application to discuss buydown options and current program guidelines.