Curious if a 2-1 buydown could make your first two years of homeownership in DC more comfortable? You’re not alone. With high local prices and rising costs, many buyers want lower initial payments without giving up a fixed-rate loan. In this guide, you’ll learn how a 2-1 buydown works, what it typically costs, how it pairs with seller credits, and the key questions to ask before you move forward. Let’s dive in.
What is a 2-1 buydown?
Simple definition
A 2-1 buydown is a temporary interest-rate subsidy that lowers your mortgage rate by 2 percentage points in year one and 1 point in year two. After that, your loan returns to the full note rate for the rest of the term. Example: a 6.5% note rate becomes 4.5% in year one, 5.5% in year two, then 6.5% from year three on.
How the subsidy works
The subsidy is prepaid at closing and placed in a lender- or servicer-controlled account. Each month during the first two years, the servicer uses those funds to reduce your principal and interest payment to match the lower temporary rate. You still have a standard fixed-rate mortgage; the buydown just covers part of the first 24 months of payments.
How it works in DC purchases
Who can fund it and disclosures
Buydown funds can come from you, the seller, a builder, or a lender credit. Third-party funding is common in competitive situations when sellers prefer incentives over price cuts. The buydown will appear on your Closing Disclosure, and your lender will show the payment schedule so you know when the monthly amount increases.
Underwriting and qualification
Many lenders qualify you using the full note rate, not the reduced buydown rate. Some may allow qualification at the lower initial rate, but that is less common and adds risk if your payment rises before your income does. Always confirm, in writing, which rate your lender will use to calculate your debt-to-income ratio.
What happens after two years
Once the subsidy is used up, your monthly principal and interest rise to the full note-rate payment. There is no automatic change to your permanent interest rate. If you want a lower long-term rate, you would need to refinance.
Costs and a DC payment example
Typical cost range
As a rule of thumb, a 2-1 buydown often costs about 1.5% to 2.5% of the loan amount. The exact figure equals the total interest subsidy needed to create those lower payments in years one and two.
Illustrative numbers for a DC-area purchase
- Purchase price: $700,000; 20% down → Loan amount: $560,000
- 30-year fixed note rate: 6.50%
- Buydown schedule: 4.50% in Year 1, 5.50% in Year 2, then 6.50% in Year 3+
- Estimated principal and interest:
- Year 1 at 4.50%: approximately $2,836 per month
- Year 2 at 5.50%: approximately $3,179 per month
- Year 3+ at 6.50%: approximately $3,542 per month
- Estimated savings versus the note-rate payment:
- Year 1: about $706 per month → around $8,472 for the year
- Year 2: about $363 per month → around $4,356 for the year
- Approximate total subsidy needed: $12,828, which is about 2.29% of the $560,000 loan
These figures cover principal and interest only. Lenders may adjust the exact escrow amount to match their month-by-month calculations and servicing rules. Because the subsidy is prepaid interest, it also affects the loan’s APR disclosure.
Seller credits and program limits
How concessions interact with buydowns
If the seller pays for your buydown, those funds count toward the seller-concession limit for your loan type. Common frameworks include:
- Conventional loans: limits vary by down payment amount. A typical structure is 3% with less than 10% down, 6% with 10% to less than 25% down, and 9% with at least 25% down.
- FHA loans: seller concessions, including buydown funds, are generally limited to 6% of the sales price.
- VA loans: seller concessions are commonly capped at 4% of the reasonable value, with certain additional allowable items.
- Jumbo and portfolio loans: program-specific rules apply.
If the buydown cost exceeds allowable seller concessions, you would need to cover the difference or renegotiate. Builders often offer temporary buydowns as incentives, and these are also treated as concessions.
Is a 2-1 buydown right for you?
Good fits in the DC market
A 2-1 buydown can be a smart tool if you:
- Want near-term payment relief during a transition, such as a new job or expected raise.
- Plan to refinance within a few years and want lower payments while you wait.
- Prefer a seller-paid incentive that keeps the purchase price intact.
- Cannot achieve a permanent rate cut with discount points but still want short-term relief.
When to consider other options
It may not be the best fit if you:
- Need permanently lower monthly payments. In that case, paying points for a lower note rate or increasing your down payment might be more effective.
- Do not have a plan for the higher payment in year three, which can create payment shock.
- Only qualify if the lender uses the reduced buydown rate and cannot qualify at the note rate.
DC buyers should also check whether local down payment assistance can be combined with a buydown, and confirm the program’s rules before relying on both together.
Questions to ask your lender and seller
Use this checklist early in your mortgage shopping and offer strategy:
- Will you qualify me at the full note rate or at the buydown rate? If at the lower rate, will you confirm that in writing?
- How will you calculate the exact buydown subsidy? Can you show the line-item math?
- Who can fund the buydown for my specific loan program, and do seller-paid funds count toward concession limits?
- Who holds the funds, and how are they applied to my monthly payment? How will this show on my Loan Estimate and Closing Disclosure?
- How will the buydown affect my APR disclosure?
- What happens if the closing is delayed, or if servicing transfers after I close?
- If I refinance or pay off the loan early, is any unused subsidy refundable?
- Can buydown funds be combined with any assistance I plan to use? What are the limits if the seller also pays other closing costs?
- How is the subsidy treated for tax purposes? Should I speak with a CPA?
- Please provide an estimate showing my payments in Year 1, Year 2, and Year 3+, plus the exact lump-sum subsidy needed at closing.
Common pitfalls to avoid
- Assuming you’ll qualify at the reduced rate. Confirm the qualification rate in writing.
- Overlooking payment shock. Build a plan for the higher payment in year three, such as savings, an anticipated raise, or a refinance timeline.
- Exceeding concession limits. Check your loan program’s seller-concession cap before you negotiate.
- Not comparing alternatives. Weigh a temporary buydown against paying points for a permanent rate cut or increasing your down payment to reduce PMI.
- Skipping documentation. Ask to see the buydown math on your Loan Estimate and Closing Disclosure so you understand how each month is subsidized.
Next steps for DC buyers
A 2-1 buydown can help you ease into ownership in a high-cost market while keeping the stability of a fixed-rate loan. The key is to model your first two years and your long-term payment, confirm your lender’s qualification method, and structure seller credits within program limits.
If you want help crafting a winning offer that uses concessions wisely and aligns with your long-term goals, reach out to our team. We’ll walk you through the trade-offs and create a clear plan from contract to close. Start the conversation with Dave Moya.
FAQs
What is a 2-1 buydown on a fixed-rate mortgage?
- It’s a temporary subsidy that lowers your rate by 2% in year one and 1% in year two, then your payment returns to the full note-rate amount in year three.
How much does a 2-1 buydown typically cost in DC?
- A common range is about 1.5% to 2.5% of the loan amount, based on the total interest subsidy needed in the first two years.
Can a DC home seller pay for my 2-1 buydown?
- Yes, if your loan program allows it, but the cost counts toward seller-concession limits that vary by loan type and down payment.
Will my lender qualify me using the reduced buydown rate?
- Many lenders qualify you at the full note rate, so always confirm in writing which rate will be used to calculate your debt-to-income ratio.
What happens if I refinance during the two-year buydown period?
- Ask your lender how refunds are handled; some programs may return any unused subsidy while others may not, depending on the terms and timing.
