How Does a Temporary Mortgage Buydown Work?

A temporary buydown places funds into a subsidy account that covers part of the borrower’s scheduled payment for a limited period. In a common 2-1 structure, the payment is calculated as if the rate were two percentage points lower in year one and one point lower in year two, then returns to the full note-rate payment in year three. The actual loan rate does not step up; the subsidy simply runs out.

What matters most

• The borrower generally must qualify using the permanent note-rate payment, not the reduced first-year payment.
• Seller or builder funds may pay the subsidy when the loan program and contribution limits allow it.
• Taxes, insurance, HOA dues, and other housing costs are not reduced by the buydown and may still change.

How to use this answer

Compare the buydown with using the same funds for closing costs, permanent points, or a price reduction. Focus on the guaranteed benefit—not a prediction that rates will fall or that refinancing will be available later.

A simple example

If the full principal-and-interest payment is $2,400, the subsidy might reduce the borrower-paid portion during the first two years. In year three, the borrower pays the full $2,400 plus current taxes, insurance, and other applicable costs. The exact figures depend on the loan terms.

What to review before you decide

• Confirm the loan program, occupancy, property type, and timeline.
• Review the complete payment and cash-to-close estimate, not one number in isolation.
• Verify current program rules and lender requirements before moving money or signing a contract.