What Is a Mortgage Buy Down?

A mortgage buy-down is a financing technique where the borrower, home seller, or builder pays an upfront fee to temporarily lower the interest rate on a mortgage. The most common structures are the 3-2-1 and 2-1 buy-downs, which lower the rate for the first three or two years, respectively.

How It Works

The upfront cost of a buy-down is exactly equal to the total interest savings over the buy-down period. This money is deposited into an escrow account at closing and is used to subsidize your monthly payments. Upfront Cost = Σ (Base Payment - Reduced Payment) × 12.

Understanding Your Results

Our calculator shows the exact upfront cost required to fund the buy-down. The chart illustrates how your monthly out-of-pocket payment increases over time while the subsidy from the escrow account decreases until the base rate applies.

Key Factors

Important factors include the loan amount, base interest rate, and the type of buy-down. In a 2-1 buy-down, your interest rate is 2% lower in year one and 1% lower in year two. In year three, the rate returns to the permanent base rate.

Practical Examples

Consider a $350,000 loan at a 7% base rate with a 2-1 buy-down. In year 1, your rate is 5%, saving you $447 per month. In year 2, your rate is 6%, saving you $230 per month. The total upfront cost funded by the seller would be around $8,127.

Tips & Best Practices

Seller concessions are the best way to fund a temporary buy-down. If you are negotiating a home purchase, asking the seller to pay for a 2-1 buy-down can make your first two years of homeownership much more affordable.

Benefits

A buy-down eases you into your full mortgage payment, providing extra cash flow in the early years of homeownership to pay for furniture, renovations, or unexpected expenses.