Seller-Paid Temporary Buydown in Cleveland, Ohio: 1-0, 2-1 & 3-2-1 Explained

Seller-Paid Temporary Buydown in Cleveland: How 1-0, 2-1 and 3-2-1 Buydowns Work

When mortgage rates are higher, sellers often assume the only way to make their home more attractive is to lower the price. But there may be another option: use a seller concession to temporarily lower the buyer’s mortgage payment through a temporary rate buydown.

A temporary mortgage buydown, such as a 1-0, 2-1 or 3-2-1 buydown, can give buyers a significantly lower payment during their first few years of homeownership.

For sellers and Realtors in Gates Mills, Pepper Pike, Chagrin Falls and throughout Northeast Ohio, that can create another way to differentiate a property from competing listings without simply reducing the sales price.

Quick Answer: How Much Does a Seller-Paid Buydown Cost?

Let’s assume a buyer is purchasing a $500,000 home with 20% down, resulting in a $400,000 conventional 30-year fixed mortgage at 7.25%.

The normal principal and interest payment would be approximately $2,729 per month.

Here’s approximately what each temporary buydown would cost the seller:

1-0 Buydown: $3,190 seller concession
Buyer saves approximately $266 per month for the first year.

2-1 Buydown: $9,429 seller concession
Buyer saves approximately $520 per month in year one and $266 per month in year two.

3-2-1 Buydown: $18,560 seller concession
Buyer saves approximately $761 per month in year one, $520 per month in year two and $266 per month in year three.

The seller is essentially funding the difference between the buyer’s temporarily reduced payment and the normal payment during the buydown period.

Now let’s look at how the math works.

Example: Buying a $500,000 Home

For all three examples, we’ll assume:

Purchase Price: $500,000
Down Payment: 20% ($100,000)
Loan Amount: $400,000
Loan: Conventional 30-Year Fixed
Note Rate: 7.25%
Normal Principal & Interest Payment: approximately $2,729/month

Taxes, homeowners insurance and HOA dues are not included in these examples.

What Is a 1-0 Buydown?

A 1-0 buydown temporarily reduces the payment as though the interest rate were 1% lower during the first year.

Year 1

Payment based on 6.25%: approximately $2,463/month

Monthly savings: approximately $266

12-month savings:

$266 × 12 = approximately $3,190

Years 2 Through 30

The buyer makes the normal payment based on the 7.25% note rate:

Approximately $2,729/month

How Much Does the Seller Need to Contribute?

Approximately $3,190 would be needed to fund the 1-0 temporary buydown in this example.

That means a relatively modest seller concession could provide the buyer with approximately $266 per month of payment relief for their entire first year.

What Is a 2-1 Buydown?

A 2-1 buydown reduces the buyer’s payment for the first two years.

Year 1

Payment based on 5.25%: approximately $2,209/month

Savings versus the normal payment:

$2,729 minus $2,209 = approximately $520/month

First-year savings:

$520 × 12 = approximately $6,239

Year 2

Payment based on 6.25%: approximately $2,463/month

Savings:

$266 × 12 = approximately $3,190

Years 3 Through 30

The buyer makes the normal payment of approximately $2,729/month based on the 7.25% note rate.

How Much Does the Seller Need to Contribute?

Add the first two years of payment savings:

$6,239 + $3,190 = approximately $9,429

So, in this example, approximately $9,429 of the seller concession would fund the 2-1 buydown.

What Is a 3-2-1 Buydown?

A 3-2-1 buydown provides an even larger payment reduction during the buyer’s first three years.

Year 1

Payment based on 4.25%: approximately $1,968/month

Monthly savings: approximately $761

Annual savings: approximately $9,131

Year 2

Payment based on 5.25%: approximately $2,209/month

Annual savings: approximately $6,239

Year 3

Payment based on 6.25%: approximately $2,463/month

Annual savings: approximately $3,190

Years 4 Through 30

Normal payment at the 7.25% note rate: approximately $2,729/month

How Much Does the Seller Need to Contribute?

$9,131 + $6,239 + $3,190 = approximately $18,560

That’s a much larger seller concession, but it provides approximately $18,560 in temporary mortgage payment assistance during the buyer’s first three years.

How Can a Buydown Help a Home Seller in Gates Mills, Pepper Pike or Chagrin Falls?

Imagine two similar homes competing for the same buyer.

A seller in Gates Mills might be considering a $10,000 price reduction after their home has been on the market longer than expected.

Instead of automatically reducing the asking price by $10,000, the seller could ask:

"What would $10,000 do for the buyer if we used it toward their mortgage instead?"

Using our example, approximately $9,429 could fund a 2-1 buydown.

That could give the buyer a principal and interest payment of approximately $2,209 per month during the first year, compared with approximately $2,729 per month without the buydown.

That’s more than $500 per month of first-year payment relief.

The same strategy could be considered by a seller in Pepper Pike or Chagrin Falls who wants to make their property stand out without immediately making another price reduction.

A listing could even advertise:

"Seller willing to contribute toward a temporary mortgage rate buydown for qualified buyers."

For buyers focused on monthly payment, that may be a meaningful benefit and another reason to take a closer look at the property.

Seller contributions and temporary buydowns are subject to loan program limits and requirements, so the structure should always be reviewed with the buyer’s mortgage professional.

FAQs

Is this an Adjustable-Rate Mortgage?

No.

In our example, the borrower has a 30-year fixed-rate mortgage at 7.25%.

The actual mortgage note does not change from 4.25% to 5.25% to 6.25% to 7.25%.

Instead, money is placed into a buydown account at closing and used to subsidize a portion of the buyer’s required payment during the temporary buydown period.

The underlying mortgage in this example remains a 7.25% fixed-rate loan for 30 years.

What Interest Rate Does the Buyer Qualify At?

For a conventional fixed-rate mortgage subject to Fannie Mae’s temporary buydown rules, the borrower must qualify using the actual note rate, not the temporarily reduced rate.

In our example, that means the borrower qualifies using the payment associated with 7.25%, even though their out-of-pocket principal and interest payment may initially be based on 5.25% with a 2-1 buydown.

A temporary buydown can make the first few years more comfortable, but it isn’t designed to make an otherwise unqualified borrower qualify for the mortgage.

What Happens If I Sell, Refinance or Pay Off the Mortgage Before the Buydown Ends?

The buydown funds don’t simply disappear.

If the mortgage is paid off before all of the buydown funds have been used, the remaining funds are handled according to the terms of the specific buydown agreement and applicable loan program requirements.

Depending on the agreement, remaining funds may be credited toward the mortgage payoff or handled in another permitted manner.

This is particularly important for buyers who are thinking:

"What happens if mortgage rates fall and I want to refinance before my buydown is over?"

Before closing, ask your mortgage professional how unused buydown funds would be handled for your specific loan.

Should I Use a Temporary Buydown or Permanently Buy Down the Interest Rate?

They accomplish different things.

A temporary buydown concentrates the payment savings in the first few years.

A permanent rate buydown generally uses discount points or other eligible funds to obtain a lower note rate for the life of the mortgage.

If a buyer expects to own the home and keep the same mortgage for many years, paying for a permanently lower rate may deserve consideration.

If the buyer values maximum payment relief during the first few years, a temporary buydown may be more attractive.

The best way to compare them is to calculate the cost, monthly savings and expected break-even period for each option.

Is a Seller Buydown Better Than Lowering the Purchase Price?

This is one of our favorite comparisons to run because the answer isn’t always obvious.

Let’s say you’re buying a home in Chagrin Falls and the seller is willing to give up $10,000 to make the deal work.

Should the seller lower the purchase price by $10,000 or use some or all of that $10,000 toward the buyer’s closing costs or temporary buydown?

A lower sales price reduces the buyer’s loan amount. Depending on the down payment and financing, however, the monthly payment reduction may be relatively modest.

Using those dollars toward a temporary buydown can potentially create a much larger payment reduction during the first few years.

That doesn’t automatically make the buydown better.

A lower purchase price creates permanent savings and reduces the amount being financed. A temporary buydown creates larger short-term payment savings.

There is also a third option worth comparing: using the seller concession toward a permanent interest rate buydown.

The right choice depends on the buyer’s financial situation, available cash, expected time in the home, expected time with the mortgage, loan program and long-term plans.

That’s why we recommend running the numbers all three ways before negotiating the offer.

The Bottom Line for Northeast Ohio Buyers, Sellers and Realtors

Whether you’re selling a home in Gates Mills, making an offer in Pepper Pike, buying in Chagrin Falls, or looking elsewhere throughout Greater Cleveland, a seller concession doesn’t have to mean simply paying the buyer’s closing costs.

There may be several ways to use those dollars strategically.

On our $500,000 example:

1-0 Buydown: approximately $3,190

2-1 Buydown: approximately $9,429

3-2-1 Buydown: approximately $18,560

For sellers, offering a buydown can provide another way to differentiate a property.

For buyers, it can mean substantially lower mortgage payments during the first few years of homeownership.

For Realtors, understanding how these programs work gives you another tool when structuring and negotiating an offer.

Before deciding to reduce the price, offer closing costs, permanently lower the rate or fund a temporary mortgage buydown, let’s run the numbers.

Sometimes the way you structure the concession can matter just as much as the amount.

Honest Advice. Many Paths. Confident Decisions.

Other Helpful Topics

Examples are for educational and illustrative purposes only and assume a $500,000 purchase price, 20% down payment, $400,000 conventional 30-year fixed-rate mortgage and 7.25% note rate. Payment examples represent principal and interest only and exclude property taxes, homeowners insurance, mortgage insurance, HOA dues and other costs. Calculations are approximate and may vary due to rounding and actual loan terms. Rates, programs, pricing and guidelines are subject to change without notice. Temporary and permanent buydowns and seller contributions are subject to applicable loan program, lender and interested-party contribution requirements. Borrowers must meet applicable credit, income, asset, property and underwriting requirements. Actual rates, payments, costs and terms vary based on borrower qualifications, property, loan program and market conditions. This is not a commitment to lend, an approval, or an offer or extension of credit. Contact Honest Rate for current rates, program eligibility and loan terms.

Honest Rate LLC. NMLS#2710620. (888) 665-1255. Honest Rate is not affiliated with any government agencies. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.