What Is a 1/1 Buydown and How Does It Work?

A 1/1 buydown is a mortgage arrangement where a lump sum paid at closing lowers your interest rate by one percentage point for the first year of the loan, after which the rate steps up to the full note rate and stays there for the remaining term. The money sits in a dedicated escrow account, and each month the servicer draws from it to cover the gap between your reduced payment and what the lender is actually owed. In most deals, the home seller or builder funds the buydown as a closing concession.

How the Rate and Payment Change

Two interest rates drive the arrangement. The permanent note rate is the contractual rate on your mortgage for its entire life. The bought-down rate for Year 1 sits exactly one percentage point below that. If your note rate is 6.5%, you pay as though the rate were 5.5% for the first 12 monthly payments.

Starting with payment number 13, the rate jumps to the full note rate. That step-up is automatic and written into the loan documents from day one. No new paperwork, no re-qualification, no lender approval. The payment calculated at the full rate then stays fixed for the remaining 29 years of a standard 30-year mortgage.

Here is where borrowers get tripped up: the loan itself is a normal fixed-rate mortgage at the note rate from the start. The buydown does not change the loan balance, the amortization schedule, or the principal you owe. It only changes how much of the interest bill comes out of your pocket versus the escrow account during that first year. Buydown funds also cannot be used to reduce the loan balance when calculating your loan-to-value ratio. The money is a payment subsidy, not a principal reduction.¹

What a 1/1 Buydown Costs

The total cost equals the monthly payment difference between the note rate and the bought-down rate, multiplied by 12. You need three numbers to run the math: the loan amount, the permanent note rate, and the loan term.

Take a $500,000 mortgage at a 7.00% note rate on a 30-year term. The monthly principal and interest payment at 7.00% is $3,326.51. At the bought-down rate of 6.00%, the payment drops to $2,997.75. The monthly subsidy is $328.76, and over 12 months the total buydown cost comes to $3,945.12.

That full amount gets deposited into a custodial escrow account at closing. Fannie Mae requires those funds to sit in a dedicated custodial bank account, separate from the lender’s own corporate funds.¹ Ginnie Mae imposes similar custodial requirements for government-backed buydown pools.² The account must be fully funded before the lender delivers the loan for purchase or securitization, so the money goes in as a lump sum on closing day rather than in installments.

Who Pays for the Buydown

In most transactions, the seller or home builder funds the buydown as part of a negotiated concession. The cost appears on the closing disclosure as a seller-paid expense, and the buydown agreement itself is a written contract between the party providing the funds and the borrower.¹

Lenders can also fund buydowns directly. When they do, the buydown agreement must include a provision requiring the funds to transfer to any new servicer if the loan’s servicing rights are sold.¹ Borrowers are not explicitly barred from funding their own buydown, but the arrangement is uncommon. Someone with extra cash at closing would typically put it toward a larger down payment or purchase permanent discount points rather than a rate reduction that expires after 12 months.

When a seller does pay, the buydown cost counts against interested-party contribution limits that vary by loan program and down payment size. On a conventional loan with more than 90% loan-to-value, seller contributions are capped at 3% of the sale price, which is often the tightest constraint on whether a buydown is feasible at all.³ FHA allows up to 6%, with temporary buydowns specifically included in that cap.⁴ The VA classifies temporary buydowns as closing costs and does not limit seller credits toward closing costs, giving VA loans more room than a comparable high-LTV conventional loan.⁵

You Still Qualify at the Full Note Rate

This is the single most important thing to understand about a 1/1 buydown: it does not help you qualify for a bigger loan. Fannie Mae requires lenders to underwrite the borrower at the permanent note rate, ignoring the bought-down rate entirely.¹ Your debt-to-income ratio, your maximum loan amount, and your ability to repay are all measured against the payment you will owe starting in month 13.

The real value is cash flow relief for one year, not increased purchasing power. You get a lower payment for 12 months. You do not get access to a more expensive home.

1/1 Buydown vs. Other Buydown Options

The 1/1 is the simplest and cheapest temporary buydown, but not the only one. Fannie Mae allows buydown plans of up to three years, with rate reductions of up to 3% and annual increases of no more than 1%.¹

1/1 buydown: rate is 1% below the note rate in Year 1, then reverts to the full rate in Year 2. Lowest upfront cost.
2/1 buydown: rate is 2% below in Year 1, 1% below in Year 2, then reverts in Year 3. The most popular structure because it offers a meaningful two-year ramp.
3/2/1 buydown: rate is 3% below in Year 1, 2% below in Year 2, 1% below in Year 3, then reverts in Year 4. Deepest initial discount, highest escrow cost.⁶

Temporary buydowns are also different from discount points, which people often confuse with them. A discount point costs 1% of the loan amount and typically reduces the rate by about 0.25% for the entire life of the loan, though the exact reduction varies by lender and market. On a $500,000 loan, one point costs $5,000 and buys a permanent reduction. Compare that to the $3,945 cost of the 1/1 buydown example above, which lasts only 12 months.

The trade-off is time horizon. Discount points only pay off if you keep the loan past a breakeven point, usually five to seven years. A temporary buydown delivers all its value in the first year and carries no long-term breakeven risk. When a seller is footing the bill, the temporary buydown makes even more sense, because you are spending someone else’s money on short-term relief rather than committing your own cash to a permanent bet on keeping the loan.

If You Refinance, Sell, or Fall Behind

Unused escrow funds do not just vanish if you pay off the mortgage before the buydown period ends. Fannie Mae’s disposition rules cover the main scenarios:

Mortgage paid in full: remaining funds are credited toward your payoff balance, or returned to you or the lender as specified in the buydown agreement.
Foreclosure: remaining funds go toward reducing the mortgage debt.
Assumption by a new buyer: the funds can continue subsidizing payments under the original terms.¹

Buydown funds cannot be applied to past-due payments if you fall behind. They exist solely to cover the scheduled interest subsidy each month.¹ If you plan to refinance during the buydown period, check your buydown agreement for the specific refund or credit terms before closing on the new loan.

One boundary worth naming: temporary buydowns are a purchase tool. Fannie Mae restricts them to fixed-rate mortgages and certain adjustable-rate plans on principal residences and second homes. Investment properties and cash-out refinances are not eligible.¹

When a 1/1 Buydown Is Worth It

The 1/1 works best in a narrow set of situations. You already qualify at the full note rate but want breathing room during the first year of homeownership, when moving, furnishing, and repair costs stack up. Or the seller is offering concessions, and the dollar amount fits a 1/1 but falls short of funding a 2/1 after other closing costs are covered. On a conventional loan with less than 10% down, the 3% contribution cap often makes the deeper structures impossible.³

It also makes sense when you have a concrete reason to expect your finances to improve within 12 months. A spouse returning to work, a scheduled promotion, or the payoff of a large debt are the kinds of situations where a first-year subsidy bridges a real gap. If you are simply hoping something changes, the buydown just delays the moment you feel the full payment’s weight.

The 1/1 is a poor fit if your real problem is affordability at the note rate. Lenders qualify you at the full rate anyway, so the buydown cannot stretch your budget into a more expensive home. And because the subsidy lasts only 12 months, total savings are modest compared to the effort of negotiating and structuring the deal. For many buyers, the seller concession dollars would do more good applied directly to closing costs, a permanent rate reduction through discount points, or a rate lock extension than funneled into a one-year payment reduction.

1
Fannie Mae. Temporary Interest Rate Buydowns
2
Ginnie Mae. Ginnie Mae MBS Guide Chapter 25 – Buydown Mortgage Pools
3
Fannie Mae. Interested Party Contributions (IPCs)
4
U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
5
Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs
6
Federal Housing Finance Agency Office of Inspector General. Temporary Interest Rate Buydowns Dashboard