The 2-1 Buydown: Why It Can Beat a Price Cut When Your Marin Listing Is Sitting
By Melissa DiVita, REALTOR®, Compass · DRE #01387955 · Fourth-generation Marin native, in real estate since 2003
The short answer: if a listing is sitting and the seller is thinking about a price reduction, offering to pay for a 2-1 buydown can do far more for a nervous buyer. On a $2 million purchase with 20% down at 7.5%, a buydown costs the seller about $38,000 and lowers the buyer’s payment by about $2,100 a month in year one. The same $38,000 as a price cut saves the buyer about $213 a month.
It’s good to have a husband who owns a mortgage business. We help mutual clients, but even more than that, it’s really helpful as a real estate agent to understand the financing side. And there’s a lot to know.
Here’s what we all know: rates are high right now, averaging in the 7s. What I find to be the coolest, most underused program out there is the 2-1 buydown.
How a 2-1 buydown works
The seller pays upfront to lower the buyer’s rate for the first two years: 2% lower in year one, 1% lower in year two, then the full rate from year three on. The money goes into an account at closing and covers the difference each month. My husband Michael explains the lender side in more detail in his guide to 2-1 and 3-2-1 buydowns.
The math on a $2 million home
$2,000,000 purchase, 20% down, a $1,600,000 loan at 7.5% on a 30-year mortgage (principal and interest only):
| Monthly payment | Saves the buyer | |
|---|---|---|
| Full rate, 7.5% | $11,187 | — |
| Year 1 at 5.5% | $9,085 | $2,103 a month |
| Year 2 at 6.5% | $10,113 | $1,074 a month |
| Year 3 on, 7.5% | $11,187 | — |
Cost to the seller: about $25,200 for year one plus $12,900 for year two, about $38,100 total. That’s less than 2% of the price.
Now the same $38,100 as a price reduction
The price drops to about $1,961,900. With 20% down, the loan is about $1,569,500 at the same 7.5%, so the payment is $10,974 a month, $213 less. The buyer also puts about $7,600 less down.
What’s more meaningful to a buyer who’s spooked about that scary payment? Saving $2,100 a month the first year and $1,000 a month the second, or $213 a month? For most buyers it isn’t close. Those first two years are when they’re furnishing, fixing things and getting settled. And if rates come down, they can refinance.
To be fair about it: a price cut lasts for the life of the loan, so a buyer who keeps the same mortgage for many years comes out ahead with the lower price over time. The buyer also still has to qualify at the full 7.5% rate, and the amount a seller can contribute depends on the loan. On a jumbo loan like this one, the rules vary by lender, so check with the buyer’s lender before you offer.
What if the buyer refinances or sells in the first two years?
Nothing is wasted. The buydown isn’t a fee. It’s money the seller sets aside at closing, and each month it covers the gap between the lower payment and the full-rate payment. The buyer’s payment just mimics a lower rate; the loan itself is at the full rate the whole time. If the buyer refinances or sells before the two years are up, the unused balance doesn’t vanish. On Fannie Mae loans it’s credited toward the payoff, and the buydown agreement spells out how it’s handled on other loans.
That’s very different from paying points to permanently buy down a rate. Points are spent at closing, and if you refinance before you hit the breakeven, that money is gone. With a seller-paid buydown, a buyer who refinances when rates drop doesn’t lose anything.
If your listing is sitting
Before the next price reduction, ask your seller to consider offering a 2-1 buydown instead. It costs about the same as a small price cut and gives buyers a real reason to write an offer now. Buyers can run their own numbers on my Marin mortgage calculator, and sellers can see how I prepare and price a listing on my selling page.
Quick answers
What is a 2-1 buydown? The seller pays upfront to lower the buyer’s mortgage rate by 2% in year one and 1% in year two. From year three on, the buyer pays the full rate.
How much does a 2-1 buydown cost on a $2 million home? With 20% down and a 7.5% rate, about $38,100, which is less than 2% of the price.
Is a buydown better than a price reduction? For the first two years, usually by a lot. On a $2 million home at 7.5%, a buydown saves the buyer about $2,100 a month in year one and $1,000 a month in year two. The same money as a price cut saves about $213 a month, but that saving lasts for the life of the loan.
Does the buyer qualify at the lower rate? No. The buyer still has to qualify at the full rate, and seller contribution limits depend on the loan. Check with the buyer’s lender first.
What happens to the buydown money if the buyer refinances early? The unused portion isn’t lost. On Fannie Mae loans it’s credited toward the payoff, and the buydown agreement says how it’s handled on other loans. Points paid to permanently lower a rate don’t work that way. That money is spent at closing whether or not you reach the breakeven.
Have a listing that’s sitting, or buying and worried about the payment? Send me a note. I’m happy to talk through the numbers.
