Temporary vs. permanent, in plain words

**A temporary buydown** lowers your payment for the first year or few years. Money set aside at closing covers the difference. Then the rate steps up to the rate on your loan note.

The common version is a 2-1 buydown: the rate is lower in year one, a bit less low in year two, and back to the full note rate from year three on.

**A permanent buydown** lowers the rate for the life of the loan. You, or a seller, pay discount points at closing. The CFPB explains that one point equals 1% of the loan amount, and paying points lowers your rate in exchange for more cost up front.

| Feature | Temporary (like a 2-1) | Permanent (discount points) |
| --- | --- | --- |
| How long the lower rate lasts | A set period, often 1 to 3 years | The life of the loan |
| What it costs | The payment difference for those years | Points, each 1% of the loan |
| What you qualify at | The full note rate | The lower, bought-down rate |
| Best fit | You want breathing room early | You'll keep the loan a long time |

## Is a 2-1 buydown a good idea?

It can be, when it fits your plans. It helps if you want a lower payment while you settle in, or you expect your income to rise.

The catch is that you have to be able to afford the full payment from day one. Fannie Mae requires lenders to qualify you on the note rate, not the bought-down rate. That protects you. In year three, your payment goes to the full amount.

It also helps to ask what else the same money could do. A credit toward the price or a permanent buydown might serve you better if you plan to stay a long time.

## Who can pay for a 2-1 buydown?

A seller or builder, the lender, or you.

Under Fannie Mae's rules, a temporary buydown can be funded by an interested party to the sale, like the seller or builder, within Fannie Mae's contribution limits. The lender can also fund it. Other loan programs have their own rules, so ask your lender.

## Does a 2-1 buydown require extra funds at closing?

Not from you, if the seller or builder is paying for it. The buydown funds are set aside at closing and held in a custodial account. Each month, part of your payment comes from that account. Fannie Mae requires the account to be fully funded when the loan is delivered.

If you're paying for the buydown yourself, the cost is part of your cash to close.

## How does a seller pay for a 2-1 buydown?

The seller, or builder, contributes the cost at closing, and it goes into the buydown account. It shows up on your Closing Disclosure.

Fannie Mae counts a seller-funded buydown as an interested party contribution. On a primary residence, those contributions are capped at 3%, 6% or 9% of the price or appraised value, depending on how much you're borrowing. The buydown has to fit under that cap along with any other credits.

Fannie Mae's other limits on temporary buydowns:

- The rate can be reduced by no more than 3 percentage points.
- The buydown period can't run longer than 3 years.
- Your share of the rate can rise no more than 1 percentage point per year.
- It applies to principal residences and second homes, not investment properties.

## Buydown or price cut?

Question

Temporary vs. permanent, in plain words

**A temporary buydown** lowers your payment for the first year or few years. Money set aside at closing covers the difference. Then the rate steps up to the rate on your loan note.

The common version is a 2-1 buydown: the rate is lower in year one, a bit less low in year two, and back to the full note rate from year three on.

**A permanent buydown** lowers the rate for the life of the loan. You, or a seller, pay discount points at closing. The CFPB explains that one point equals 1% of the loan amount, and paying points lowers your rate in exchange for more cost up front.

| Feature | Temporary (like a 2-1) | Permanent (discount points) |
| --- | --- | --- |
| How long the lower rate lasts | A set period, often 1 to 3 years | The life of the loan |
| What it costs | The payment difference for those years | Points, each 1% of the loan |
| What you qualify at | The full note rate | The lower, bought-down rate |
| Best fit | You want breathing room early | You'll keep the loan a long time |

## Is a 2-1 buydown a good idea?

It can be, when it fits your plans. It helps if you want a lower payment while you settle in, or you expect your income to rise.

The catch is that you have to be able to afford the full payment from day one. Fannie Mae requires lenders to qualify you on the note rate, not the bought-down rate. That protects you. In year three, your payment goes to the full amount.

It also helps to ask what else the same money could do. A credit toward the price or a permanent buydown might serve you better if you plan to stay a long time.

## Who can pay for a 2-1 buydown?

A seller or builder, the lender, or you.

Under Fannie Mae's rules, a temporary buydown can be funded by an interested party to the sale, like the seller or builder, within Fannie Mae's contribution limits. The lender can also fund it. Other loan programs have their own rules, so ask your lender.

## Does a 2-1 buydown require extra funds at closing?

Not from you, if the seller or builder is paying for it. The buydown funds are set aside at closing and held in a custodial account. Each month, part of your payment comes from that account. Fannie Mae requires the account to be fully funded when the loan is delivered.

If you're paying for the buydown yourself, the cost is part of your cash to close.

## How does a seller pay for a 2-1 buydown?

The seller, or builder, contributes the cost at closing, and it goes into the buydown account. It shows up on your Closing Disclosure.

Fannie Mae counts a seller-funded buydown as an interested party contribution. On a primary residence, those contributions are capped at 3%, 6% or 9% of the price or appraised value, depending on how much you're borrowing. The buydown has to fit under that cap along with any other credits.

Fannie Mae's other limits on temporary buydowns:

- The rate can be reduced by no more than 3 percentage points.
- The buydown period can't run longer than 3 years.
- Your share of the rate can rise no more than 1 percentage point per year.
- It applies to principal residences and second homes, not investment properties.

## Buydown or price cut?

Accepted Answer

Ask your lender to show both side by side over the time you expect to keep the loan:

What Is a Rate Buydown? 2-1 vs. Permanent