2-1 Temporary Buy-Down Calculator (Seller-Paid)

How a 2-1 Temporary Buy-Down Works

A 2-1 buy-down is a seller-paid concession that lowers the buyer's effective interest rate for the first two years of the loan. In year one, the buyer pays as if the rate were 2% lower than the note rate. In year two, the payment reflects a 1% lower rate. From year three onward, the buyer pays the full note rate for the remaining 28 years (on a 30-year loan).

Buy-down funds sit in a separate escrow account at closing. Each month, the loan servicer pulls from that escrow to cover the difference between the buyer's reduced payment and the actual note-rate payment. If the buyer refinances or sells before the buy-down period ends, unused escrow is refunded to the buyer (not the seller), per Fannie Mae and Freddie Mac rules (source: Fannie Mae Selling Guide B2-1.5-04).

Why Sellers Offer Buy-Downs Instead of Price Cuts

From a seller's perspective, a buy-down is often cheaper than an equivalent price reduction. A $10,000 buy-down may reduce a buyer's first-year payment by $300/month — making the home feel affordable — while preserving the comparable-sales (comp) price for the neighborhood. A direct $10,000 price cut lowers everyone's comps and may not even close the affordability gap because it only saves the buyer about $60/month in payment.

Buy-downs also let buyers qualify for the loan based on the lower year-one payment in some cases (FHA, VA) — though most conventional lenders qualify on the note rate. Check with your loan officer before assuming this works for DTI.

Source: consumerfinance.gov consumer guidance on seller concessions

2-1 Buy-Down vs Permanent Discount Points

Permanent discount points cost roughly 1% of the loan amount per 0.25% rate reduction. Spending the same dollars on permanent points instead of a 2-1 buy-down usually wins if you stay in the loan 5+ years, because the rate stays low for the full term.

Buy-downs win when: (a) you plan to refinance in 1-2 years and want the cash-flow help short-term, (b) the seller is paying so it's free to you, or (c) you need the first-year payment to fit a budget transition (new job, military move, etc.). Use our mortgage points calculator to compare.

Watch the Underwriting and Disclosure Details

Buy-downs must be disclosed on the Closing Disclosure as a seller-paid item under section J. The actual loan note rate stays the same — only the buyer's monthly cash payment is reduced via the escrow. Lenders typically cap seller concessions at 6% of the sale price for conventional loans (FHA caps at 6%, VA at 4%).

If you refinance before the buy-down period ends, ask your servicer for a refund of unused escrow — this is your money. Some servicers won't refund automatically. Read your loan documents and the buy-down agreement carefully.

IRS Tax Treatment Of The Buy-Down Escrow Refund

The unused escrow refund you receive when you refinance or sell during a 2-1 buy-down period is not taxable income — it is a return of your own funds, not a rebate of interest you paid. But the treatment of the underlying reduced payments matters for the mortgage-interest deduction: per IRS Publication 936, you can only deduct the interest you actually paid, so in year 1 and year 2 your Schedule A deduction is based on the buyer-paid portion, not the escrow-covered portion. On refinance, the servicer will issue a corrected Form 1098 showing the interest you actually paid — verify the 1098 matches your statements before filing. If the seller paid the buy-down but you refinance early and the refund goes to you, the refund is still a return of principal, not a taxable event under CFPB Regulation Z §1026.19.