Temporary Mortgage Rate Buydown: 2-1 and 3-2-1 Rules

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: in a temporary buydown, money is placed in an escrow account at closing and paid out each month to cover part of your payment for the first one to three years. Your note rate does not change: when the account runs out, you pay the full payment under the note. FHA, VA and USDA rules all require the lender to qualify you at the note rate, not the reduced rate. Permanent discount points instead lower the note rate for the life of the loan. This page covers federal rules only. It is general information, not legal or financial advice.

How a temporary buydown works

VA’s Lenders Handbook describes two kinds: a marketing tool, where a builder, seller or lender funds an escrow to reduce your payments in the early years, and one you fund yourself as a money management tool. It says the monthly buydown payments must last at least 1 year and no more than 3 years, that the reductions end in steps on each anniversary of the first payment due date, and that VA limits each yearly increase in your payment to the amount that matches a one-percentage-point rise in the effective rate (Chapter 7, Topic 7, change date July 27, 2023, VA, chapter updated July 24, 2026, read October 30, 2026). A 2-1 plan cuts the effective rate by 2 points in year 1 and 1 point in year 2; a 3-2-1 plan adds a third year.

Example: a 2-1 buydown

This example is only for the math, with an example loan and rates, not terms from any lender. It uses a $300,000, 30-year fixed loan with a note rate of 6.50%, principal and interest only, with each payment figured over the full 30 years at the effective rate, as in VA’s own example, and rounded to the dollar.

Year	Effective rate	Your payment	Paid from the buydown escrow	Escrow used that year
1	4.50%	$1,520	$1,896 − $1,520 = $376	$376 × 12 = $4,512
2	5.50%	$1,703	$1,896 − $1,703 = $193	$193 × 12 = $2,316
3 to 30	6.50%	$1,896	$0	$0
Total subsidy				$4,512 + $2,316 = $6,828

The $6,828 is about 2.28% of the loan amount. Whoever funds the buydown puts that amount into escrow at closing. The lender still checks that you can pay $1,896 a month from the start.

Temporary buydown or permanent points

Discount points paid at closing lower the note rate itself, so the lower payment lasts as long as you keep the loan. This comparison is only for the math: if the same $6,828 bought a permanent rate of 6.00% (an example figure, not a price from any lender), the payment would be $1,799, or $97 a month less than $1,896.

Item	Temporary 2-1 buydown	Permanent points (example)
Note rate	6.50%	6.00%
Payment in years 1 and 2	$1,520, then $1,703	$1,799
Payment from year 3	$1,896	$1,799
Savings in the first 24 months	$6,828	$97 × 24 = $2,328
Months to recover $6,828 at $97 a month	Not applicable	71 (rounded up)

The buydown saves more in the first two years; the permanent rate saves more if you keep the loan past the break-even point. Your lender’s rate sheet sets what points actually buy; see mortgage discount points and break-even.

Who may fund it, and the caps

VA says a temporary buydown may be funded by the seller, lender, builder or Veteran, and that one funded by the builder or seller is a seller concession, which VA caps at 4 percent of the reasonable value (VA, last updated January 14, 2026; Chapter 8, Topic 5, VA). VA also says lenders may not fund or set up a temporary buydown by charging an above market interest rate (Chapter 7, Topic 7a).

HUD counts an interested party’s payment for permanent and temporary buydowns within its 6 percent of the sales price limit on interested party contributions (HUD Handbook 4000.1, II.A.4, interested party contributions, HUD, Handbook update issued August 12, 2026). USDA bars guaranteed loan funds from being used to establish a buydown account and bars a seller or other interested third party from contributing more than 6 percent of the sales price toward your financing costs, closing costs, escrow accounts or giveaways, unless the agency provides otherwise (7 CFR 3555.102(f) and (h), eCFR, text up to date as of October 28, 2026). See seller concession limits.

Program rules side by side

Rule	FHA	VA	USDA guaranteed
Qualify at	The note rate	The full payment under the note	The note rate
Loan types	Not on refinances or adjustable-rate mortgages	Fixed-rate loans only	Not limited in the rule
Size of the cut	Not set in the sections cited here	Each yearly payment rise no more than a 1-point rate rise; 1 to 3 years	No more than 2 points below the note rate; rising no more than 1 point a year
Who may fund	Interested party payments count in the 6% limit	Seller, lender, builder or Veteran	Lender, seller or a third party gift; not your own or borrowed funds

Sources for the table: HUD Handbook 4000.1 says the lender must use the note rate when calculating principal and interest for a loan with a temporary buydown (II.A.4 and II.A.5, temporary interest rate buydowns), and that temporary buydowns are not permitted with refinance transactions (II.A.8, a section dated 11/10/2026, after our read date) or with adjustable-rate mortgages (II.A.8, Section 251 ARMs). VA says the lender must find that you can afford the full payment without the buydown contributions, though the buydown can be a compensating factor (Chapter 7, Topic 7d). VA’s web page says temporary buydowns can be used on fixed-rate purchase loans, cash-out refinances and interest rate reduction refinancing loans that meet VA requirements, while its refinance chapter bars buydown accounts created through an above market rate; ask the lender how VA’s rules apply to a refinance. USDA lists its conditions for a funded buydown account: underwriting at the note rate, a cut of no more than 2 percentage points, increases no more than once a year and by no more than 1 percentage point, an escrow fully funded for the buydown period with monthly releases straight to the lender, and no personal or borrowed funds from you (7 CFR 3555.151(h)(7), eCFR). USDA defines a funded buydown account as an escrow funded by the lender, the seller or a third party gift (7 CFR 3555.10, eCFR).

If you sell, refinance or the account runs short

HUD says the lender must set up an escrow for the buydown, and that the escrow agreement must not let undistributed funds go back to the provider if the home is sold or the loan is paid in full, nor give unspent funds to you in cash unless your own funds set up the account. It also says that if escrow payments are not received for any reason, you owe the total payment under the note (II.A.6, temporary interest rate buydown escrow requirements). VA says the funds must be held in a segregated escrow, may not be used for past-due payments, must be credited against your debt if the loan is foreclosed or prepaid, and may not go back to whoever set up the escrow; if the home is sold subject to or on an assumption of the loan, the escrow keeps paying for the new borrower (Chapter 7, Topic 7b). Ask the lender what your buydown agreement says.

How it shows on the Loan Estimate

Regulation Z says the disclosures must reflect the terms of the legal obligation between you and the creditor (12 CFR 1026.17(c)(1), eCFR, text up to date as of October 28, 2026). The official comments explain what that means for buydowns (Supplement I, comments 17(c)(1)-3 to -5, eCFR):

Seller or other third-party buydown written into your loan contract: the APR is a composite rate, and the projected payments show the different payment levels. The seller’s money is not part of the finance charge; it shows as a seller credit in the summaries of transactions on the Closing Disclosure.
Third-party buydown not in your loan contract: the APR and payments are based on the note rate alone, and the seller’s money still shows as a seller credit.
A buydown you pay for: your payment is a prepaid finance charge, even if it goes into escrow; the APR is a composite rate; and the loan is shown as a step rate product.
A buydown the lender pays for: the disclosures follow the terms of the legal obligation between you and the lender.
A split buydown (you and a seller both pay): your part is treated as a consumer buydown and the seller’s part as a third-party buydown.

Compare the Loan Estimate with the buydown agreement, and see Loan Estimate closing cost limits for how fees may change before closing (12 CFR 1026.37, eCFR; 1026.38, eCFR). An advertisement may show the reduced rate only if it also shows how long that rate lasts and the rate for the rest of the term (Supplement I, comment on 1026.24(c)).

Questions to ask the lender

Who is funding the buydown, how much is going into escrow, and is it written into my loan contract?
What is my payment in each year of the buydown, and what is the full payment under the note?
Did you qualify me at the note rate?
What happens to any money left in the escrow if I sell or refinance early?
If the same money went to discount points instead, what permanent rate would I get?
Does the buydown count toward the seller concession limit for my loan type?

Checklist

Budget for the full payment from day one; the reduced payment ends on a set date.
Get the written buydown agreement and check it against the Loan Estimate and Closing Disclosure.
Note the date each payment rises.
Compare the subsidy with what permanent points would buy over the time you expect to keep the loan.

To find housing counseling agencies that HUD has vetted, use the CFPB housing counselor search. You can submit a complaint at consumerfinance.gov/complaint.

Start your loan request How our service works

Sources

Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

Temporary Mortgage Rate Buydowns: How 2-1 and 3-2-1 Plans Work