Curious how to lower your first two years of mortgage payments without changing the sales price? If you are buying or selling in St. Louis, a 2-1 buydown can be a smart tool to ease early cash flow or make a listing stand out. You want a clear explanation, local context, and real numbers so you can decide if it fits your plan. In this guide, you will learn how a 2-1 buydown works, what it costs, who can pay for it, and when it makes sense in the St. Louis market. Let’s dive in.
What is a 2-1 buydown?
A 2-1 buydown is a temporary interest-rate subsidy. Your mortgage payment is calculated at 2 percentage points below the note rate in year 1 and 1 percentage point below the note rate in year 2. Starting in year 3, your payment resets to the permanent note rate for the rest of the loan.
The subsidy is funded with a single lump sum at closing and is used by the lender to “top up” your lower payments during the first 24 months. Conventional, FHA, VA, and USDA loans can allow temporary buydowns. Exact rules and underwriting vary by loan program and lender, so confirm details early in your process.
How it works
- A one-time subsidy is paid at closing by the seller, builder, buyer, or an approved third party.
- The lender holds that subsidy and applies it to your payment schedule for the first two years.
- Your payment is based on a rate 2 points lower in year 1 and 1 point lower in year 2.
- In year 3, your payment returns to the note rate and stays there for the remaining term.
Who pays and what it costs
A 2-1 buydown can be paid by:
- Seller or builder as an incentive to attract buyers
- Buyer using cash at closing
- A third party, such as a developer or employer program
The lender calculates the upfront subsidy from the interest-rate difference over the first two years. In many markets, the cost often falls around 1 to 2 percent of the loan amount, though it can be lower or higher depending on the rate, loan size, and lender method. For a $300,000 loan, the total payment reduction in the first two years is typically in the several-thousand-dollar range. The exact subsidy you will see on your closing disclosure is based on the lender’s present-value calculation.
If a seller funds the buydown, it usually counts as a seller concession. Whether it fits within program limits depends on your loan type and down payment. Work with your lender to verify contribution rules before you finalize offer terms.
Example payments and savings
Below are simple illustrations using a 30-year fixed loan with a 6.50 percent note rate. Year 1 is priced at 4.50 percent, year 2 at 5.50 percent, and year 3 returns to 6.50 percent. Use these as examples only and ask your lender for current St. Louis quotes.
$300,000 loan example
- Year 1 payment at 4.50 percent: about $1,520 per month
- Year 2 payment at 5.50 percent: about $1,704 per month
- Year 3 and beyond at 6.50 percent: about $1,897 per month
- Savings vs. the note-rate payment: about $377 per month in year 1 and about $193 per month in year 2
- Total nominal savings over two years: about $6,840
The upfront subsidy a lender collects is usually lower than the undiscounted two-year savings because it is a present-value lump sum and reflects lender calculation methods.
$200,000 loan example
- Year 1: about $1,013 per month
- Year 2: about $1,136 per month
- Year 3 and beyond: about $1,265 per month
- Savings vs. the note-rate payment: about $252 per month in year 1 and about $129 per month in year 2
$400,000 loan example
- Year 1: about $2,027 per month
- Year 2: about $2,272 per month
- Year 3 and beyond: about $2,529 per month
- Savings vs. the note-rate payment: about $502 per month in year 1 and about $257 per month in year 2
Buyer pros and cons
Pros
- Lower monthly payments for the first two years, which can help with moving expenses, renovations, or a transition period.
- Can make budgeting easier and reduce early payment shock.
- Often funded by the seller or builder in a competitive or price-sensitive situation.
Cons
- The payment increases in year 3. Plan ahead for the permanent note-rate payment.
- Many lenders qualify you at the note rate, so the buydown may not improve your ability to qualify.
- The buydown subsidy is a prepaid finance charge and will affect APR comparisons.
Seller and builder pros and cons
Pros
- Makes a listing more attractive without cutting the sales price, which can help preserve comparable sales and appraisal considerations.
- Can help move inventory or compete with other listings by improving a buyer’s early payment.
Cons
- Requires an upfront contribution at closing and must comply with loan program and disclosure rules.
Underwriting, disclosures, and taxes
- Qualifying: Many lenders underwrite using the permanent note rate. Some may use the buydown payment for debt-to-income if the subsidy is documented and allowed by the program. Confirm with your lender at the start.
- Seller contribution limits: FHA, VA, USDA, and conventional loans have different rules. Your lender will check whether your buydown fits within allowable contributions.
- APR and TILA: The subsidy is a prepaid finance charge and appears in APR and Truth-in-Lending disclosures. Expect to see it on your closing documents.
- Taxes: Tax treatment of buyer-paid or seller-paid buydowns is not uniform. Talk with a tax professional for guidance.
- Refinance or early payoff: The buydown is temporary. If you pay off or refinance early, the used portion of the subsidy does not revert to the seller. Terms can vary by agreement.
When it makes sense in St. Louis
A 2-1 buydown can be a good fit if you want temporary payment relief while you settle in, expect income to rise, or need budget room for improvements. In the St. Louis metro, sellers and builders often use buydowns as incentives in price-sensitive segments or new-construction communities. This can help keep the contract price intact while giving buyers meaningful payment relief in the first two years.
If you are layering assistance, programs from the Missouri Housing Development Commission and some city or county initiatives may help with down payment or closing costs. Ask your lender to confirm how any assistance interacts with a buydown and whether combined contributions remain within program limits.
How to set up a 2-1 buydown
- Talk to a local lender early. Ask about eligibility, underwriting approach, and documentation requirements.
- Get a written quote. Request the exact subsidy dollar amount for your loan size and today’s note rate.
- Verify contribution limits. Confirm whether the buydown fits within your loan program’s allowable seller concessions.
- Compare scenarios. Review side-by-side estimates for no buydown, a 2-1 buydown, permanent points, and alternative incentives.
- Document in the contract. Make sure the purchase agreement and lender disclosures clearly show the buydown and who is paying.
- Ask a tax advisor. Get professional advice on tax questions before you close.
Alternatives to compare
- Permanent rate buydown with discount points: Lowers the rate for the entire loan. Often better if you plan to keep the mortgage long term and have extra cash at closing.
- Price reduction: Cuts the monthly payment for the life of the loan but changes comparable sales. Some sellers prefer a buydown to preserve comps.
- Closing cost credit: Reduces cash needed at closing. Useful if you are tight on upfront funds.
Run the math on each option for your time horizon, monthly budget, and cash at closing.
Final thoughts
A 2-1 buydown does one thing very well: it reduces your mortgage payment for the first two years to create breathing room while you settle into your new St. Louis home. It does not change your permanent note rate, and it must fit within your loan program’s rules. If you want a simple, temporary payment drop and a competitive offer structure, it is worth a look.
Ready to see real numbers for your price range and neighborhood targets in St. Louis? Reach out to Mary Krummenacher for an introduction to trusted local lenders and a clear plan to use a 2-1 buydown or alternative incentives. Get Access To Our Private Listings.
FAQs
What is a 2-1 buydown on a mortgage?
- A 2-1 buydown is a temporary subsidy that lowers your payment by 2 percentage points in year 1 and 1 point in year 2, then returns to the note rate in year 3.
Who can pay for a 2-1 buydown in St. Louis?
- The seller, builder, buyer, or an approved third party can fund the subsidy as part of closing, subject to loan program and lender rules.
Will a 2-1 buydown help me qualify for a loan?
- Maybe. Many lenders qualify you at the permanent note rate. Some may consider the lower buydown payment if allowed and documented. Confirm with your lender.
How much does a 2-1 buydown usually cost?
- Costs often fall around 1 to 2 percent of the loan amount, though the exact subsidy depends on rates, loan size, and lender calculations.
Is a 2-1 buydown better than paying points?
- It depends on how long you plan to keep the mortgage and your cash at closing. Points lower the rate permanently. A 2-1 buydown lowers payments temporarily and is often cheaper upfront.
How will the buydown show up on closing documents?
- The subsidy appears in closing and Truth-in-Lending disclosures and may be listed as a seller concession or prepaid finance charge, depending on who funds it.
