2-1 Buydown vs Permanent Buydown: What's Best?

How a 2-1 Buydown Works

A 2-1 buydown is a temporary payment reduction funded by a subsidy — typically from the seller, builder, or lender. In year one, the payment is calculated as if the rate were 2% lower than the actual note rate. In year two, the payment is calculated as if the rate were 1% lower. In year three and beyond, the payment is at the full note rate.

The key detail: the loan amortizes at the actual note rate from day one. The subsidy covers the difference between what you pay and what the full payment would be. This means your loan balance at the end of year two is slightly higher than it would be if you had been paying the full rate — because the subsidy is not reducing principal, it is just covering part of the interest.

On a $400,000 loan, the total 2-1 buydown subsidy over two years is roughly $8,000 to $10,000, depending on the rate. That subsidy is collected at closing and held in an escrow account that releases monthly to cover the payment difference.

How a Permanent Buydown Works

A permanent buydown uses discount points paid at closing to permanently reduce the note rate. One discount point equals 1% of the loan amount and typically reduces the rate by approximately 0.25% (the actual reduction varies by lender and market conditions). The lower rate applies for the life of the loan — it is not temporary.

Because the permanent buydown actually reduces the note rate, it affects both the payment and the amortization. A lower rate means less interest accrues each month, which means more of each payment goes to principal. Over time, the loan balance is lower than it would be at the higher rate.

The Break-Even Analysis

The decision between a 2-1 buydown and a permanent buydown comes down to break-even: how long does it take for the cumulative savings from the permanent buydown to exceed the cumulative savings from the 2-1 buydown?

In the first two years, the 2-1 buydown typically produces a lower payment than the permanent buydown — because the 2-1 subsidy is larger than the rate reduction from one or two points. Starting in year three, the permanent buydown begins to pull ahead, because the 2-1 subsidy has expired and the permanent buydown continues to save money every month.

For most borrowers staying more than 3 to 5 years, the permanent buydown produces more total savings. For borrowers who plan to sell or refinance within two to three years, the 2-1 buydown may be the better use of the seller's concession — because you get the benefit in the years you actually have the loan.

The Refinance Consideration

If you buy down your rate permanently and then refinance in two years, you lose the benefit of the buydown. You paid for a rate you no longer have. In an environment where rates may fall, a 2-1 buydown can be a smarter structure because it lowers your payment in the near term without requiring you to pay for a permanent reduction you may not keep.

The honest answer is that no one knows exactly when rates will fall or by how much. The decision should be based on your specific time horizon and your honest assessment of whether you are likely to refinance in the next two to three years — not on a prediction about the rate market.

Which One Is Right for You?

If you are planning to stay in the home for five or more years and do not expect to refinance soon, a permanent buydown is usually the better financial decision. If you are buying in a market where rates may fall significantly, or if you plan to sell or refinance within two to three years, a 2-1 buydown may be more appropriate.

The most important thing is to run the actual numbers for your specific loan amount, rate, and time horizon — not to rely on a general rule. A planning review can help you model both options against your specific situation.