Mortgage Rate Buydowns in NYC: 2-1 vs 3-2-1
A mortgage rate buydown is money, usually paid by the seller, that lowers your interest rate for the first few years of your loan. A 2-1 buydown cuts your rate for two years. A 3-2-1 cuts it for three. On a $1.5 million NYC home, either one can lower your payment far more than a price cut that costs the seller the same amount, but both buyers and sellers give something up, so it's worth weighing the pros and cons.
In 30 seconds
- The seller pays at closing, and your rate drops for one to three years.
- A 2-1 costs about 2.25% of the loan. A 3-2-1 costs about 4.5%.
- You still qualify at the full rate, and you know your full payment up front.
- It helps your early payments most. A price cut can save more if you keep the loan long term.
- Same cost as a price cut, you save$154/mo
- 3-2-1 savings in year one$2,283/mo
- 2-1 cost to the seller~$28,300
- 3-2-1 cost to the seller~$55,700
01
What is a mortgage rate buydown?
It's a credit that lowers your interest rate, usually paid by the seller. The money goes into an account at closing and covers the difference between your lower starting payment and your full payment.
It matters right now because rates are high. The average 30-year mortgage rate climbed back above 7% by the end of September, according to the Compass Queens Market Report. A buydown makes your first years of ownership more affordable while you wait for rates or your income to change.
02
How do 2-1 and 3-2-1 buydowns work?
Your rate starts low and steps up once a year until it reaches the full rate. Here's what that looks like on a $1.5 million home with 20% down, a $1.2 million loan at 7.25%.
2-1 buydown
2 points off in year one, 1 point off in year two
3-2-1 buydown
3, 2 and 1 points off over the first three years
Monthly principal and interest only. Taxes, insurance and common charges or maintenance are extra.
03
How much does a buydown cost?
About the same as the payment savings it creates. Lenders use these rules of thumb:
- 2-1 buydownAbout $28,300 on a $1.2 million loan~2.25%
- 3-2-1 buydownAbout $55,700 on a $1.2 million loan~4.5%
- Permanent buydown1 point, or 1% of the loan, for each 0.25% off your rate1 pt / 0.25%
Percentages are of the loan amount. Your lender will price the exact cost.
04
Is a buydown better than a price cut?
For your monthly payment, usually yes. A $28,300 price cut saves you about $154 a month. The same $28,300 spent on a 2-1 buydown saves you about $1,560 a month in year one.
Option | Seller pays | Year-one rate | Year-one payment | You save |
|---|---|---|---|---|
No concession | $0 | 7.25% | $8,186 | – |
Price cut | $28,300 | 7.25% | $8,032 | $154/mo |
2-1 buydown | ~$28,300 | 5.25% | $6,626 | $1,560/mo |
3-2-1 buydown | ~$55,700 | 4.25% | $5,903 | $2,283/mo |
Permanent, to 6.75% | ~$24,000 | 6.75% | $7,783 | $403/mo for the life of the loan |
$1.5 million purchase, 20% down, 30-year fixed at 7.25%. Principal and interest only. Permanent buydown cost estimated at 2 points. Illustrative figures, not a rate quote.
05
What are the pros and cons of a buydown for buyers and sellers?
A buydown helps both sides in the short term, but each side gives something up. Here's what to weigh before you ask for one or offer one.
For buyers
Pros
- Much lower payments in the first one to three years.
- Breathing room for moving costs, furniture or renovations.
- Time for your income to grow or for rates to fall so you can refinance.
Cons
- Your payment rises every year until it reaches the full rate.
- You pay a higher price, so your loan, down payment and some closing costs are higher too.
- Near $1 million, a higher price can push you over the NYC mansion tax line, which adds 1% of the price.
- If you refinance early, a lower price keeps paying off through a smaller loan. A buydown's benefit ends.
For sellers
Pros
- You keep a higher contract price, which also protects future comparable sales in your building.
- Your home becomes affordable to more buyers who are watching their monthly payment.
- It may sell your home faster than a price cut of the same cost.
Cons
- It's a real cost. Your net proceeds drop just as they would with a price cut.
- It doesn't help cash buyers, who often prefer a lower price instead.
- Loan programs cap seller contributions, and the home still has to appraise at the higher price.
06
Should you choose a temporary or permanent buydown?
It depends on how long you plan to keep the loan.
Temporary (2-1 or 3-2-1)
- Bigger savings in the first one to three years.
- A good fit if you expect your income to grow.
- A good fit if you plan to refinance when rates drop.
Permanent
- Smaller savings, but they last for the life of the loan.
- A good fit if you plan to keep the home and loan long term.
- Paid for with discount points at closing.
07
What should NYC buyers know before asking for a buydown?
Five things to settle with your lender and agent before you negotiate:
- You qualify at the full rate.A buydown lowers your early payments, not how much you can borrow.
- Your full payment is disclosed up front.You'll see every step-up before you sign, so there are no surprises.
- Seller contributions have limits.Each loan program caps how much a seller can contribute, often based on your down payment.
- Co-ops take more planning.Board approval and lender rules apply, so bring your lender in early.
- Put it in the contract.The buydown is negotiated as a seller concession and written into your purchase agreement.
08
Why would a NYC seller agree to a buydown?
Because it can sell the home without cutting the price. A buydown makes the monthly payment more attractive, widens the pool of buyers who can afford it, and helps the seller hold a higher contract price, which also matters for future comparable sales in the building.
Frequently asked questions
What is a mortgage rate buydown?
It's money paid at closing, usually by the seller, that lowers the buyer's interest rate. A temporary buydown lowers the rate for the first one to three years. A permanent buydown lowers it for the life of the loan.
What is a 2-1 buydown?
Your rate is 2 points lower in year one and 1 point lower in year two, then returns to the full rate in year three. On a 7.25% loan, that's 5.25%, then 6.25%, then 7.25%.
What is a 3-2-1 buydown?
Your rate is 3, 2 and 1 points lower over the first three years, then returns to the full rate in year four. On a 7.25% loan, that's 4.25%, 5.25%, 6.25%, then 7.25%.
How much does a mortgage buydown cost?
As a rule of thumb, a 2-1 buydown costs about 2.25% of the loan amount and a 3-2-1 costs about 4.5%. A permanent buydown costs about 1 point, or 1% of the loan, for every 0.25% drop in the rate. Your lender will give you the exact figure.
Is a buydown better than a price reduction?
For your monthly payment in the first few years, usually yes. In our $1.5 million example, the same $28,300 saves about $1,560 a month in year one as a 2-1 buydown, versus about $154 a month as a price cut. If you plan to keep the home and the loan for a long time, compare both.
Do I qualify for a mortgage at the lower buydown rate?
Generally no. Lenders usually qualify you at the full rate, so a temporary buydown lowers your early payments but doesn't increase how much you can borrow.
Can you use a buydown on a NYC co-op or condo?
Yes, though they're most common with condos and new developments. Co-ops add board approval and lender requirements, so plan the buydown with your lender early.
What are the downsides of a 3-2-1 buydown?
Your payment rises each year until it reaches the full rate in year four, and you still have to qualify at the full rate. Because the seller keeps a higher price, your loan and some closing costs are higher than they'd be with a price cut. If you plan to keep the loan long term, a price cut or a permanent buydown can save more over time.
Should a seller offer a buydown or lower the price?
It depends on the buyers. For buyers focused on their monthly payment, a buydown usually has more impact for the same cost. For cash buyers, or buyers near the $1 million mansion tax line, a lower price can be more attractive. Both reduce the seller's net proceeds.
What happens to buydown funds if I refinance or sell early?
It depends on the loan program and lender. Unused funds are often applied to your loan balance rather than lost, but confirm how your lender handles them before you close.
Is a temporary or permanent buydown better?
A temporary buydown gives you bigger savings up front, which helps if you expect your income to grow or plan to refinance. A permanent buydown gives smaller savings that last as long as you keep the loan.
This article is general information, not a loan offer or financial advice. Rates, costs and eligibility vary by lender, loan program and borrower. Speak with a licensed mortgage professional before making decisions.
Want to see what a buydown could do for your monthly payment? Contact Darrell Williams for a consultation and an introduction to a trusted lender, or view my Compass profile and listings.
