A 2-1 Temporary Interest Rate Buydown is a residential mortgage structure commonly funded by home sellers or homebuilders as a closing concession to ease a buyer into their mortgage payments during the first 24 months of homeownership.
While the underlying promissory note is a standard 30-year fixed-rate mortgage, the borrower's actual monthly out-of-pocket payment follows a stepped schedule: - Year 1 (Months 1–12): Effective interest rate is 2.00% (200 bps) below the permanent note rate. - Year 2 (Months 13–24): Effective interest rate is 1.00% (100 bps) below the permanent note rate. - Years 3–30 (Months 25–360): Payment permanently locks at the full note rate for the remainder of the loan.
At closing, the exact dollar difference between the full note-rate payments and the reduced Year 1 and Year 2 payments is deposited into a dedicated custodial buydown escrow account. Each month during the first two years, the loan servicer draws from this escrow subsidy to supplement the borrower's payment.