What if you could lower your first-year mortgage rate by 2 percentage points without changing your loan? If you are buying in Denver, a 2-1 buydown can create breathing room in your budget while you settle into a new home. You still need a clear plan for year three when the payment steps up, plus the right lender and contract language. In this guide, you’ll learn exactly how a 2-1 buydown works, who can pay for it, when it makes sense in Denver, and the steps to put one in place confidently. Let’s dive in.
What is a 2-1 buydown?
A 2-1 buydown is a temporary interest-rate subsidy that lowers your mortgage rate for the first two years of a new loan.
- Year 1: your rate is reduced by 2.00 percentage points from the note rate.
- Year 2: your rate is reduced by 1.00 percentage point from the note rate.
- Year 3 and beyond: you pay the permanent note rate shown on your mortgage.
It is a short-term affordability tool. Your loan’s note rate does not change. The buydown funds cover the difference between the reduced payments in years 1 and 2 and the payment that would have been due at the permanent rate.
How it works, with real numbers
Here is an illustrative example to show the math. Actual results vary by lender and program.
- Loan amount: $400,000, 30-year fixed, note rate 6.00%
- Monthly principal and interest at 6.00%: about $2,398
- Year 1 at 4.00%: about $1,910, monthly savings about $488, year-1 subsidy about $5,856
- Year 2 at 5.00%: about $2,147, monthly savings about $251, year-2 subsidy about $3,011
- Total subsidy needed for the 2-1 buydown: about $8,867
Lenders may require the exact total or a present-value version of the subsidy to be deposited at closing. Taxes, insurance, and HOA dues are separate and are not reduced by the buydown unless your lender structures it that way.
Who pays and how funds flow
Several parties can fund a buydown in Denver purchases:
- Seller, often as a negotiated concession
- Builder or developer, especially in new construction
- Lender, through credits or promotions
- You or a family member, as an added closing cost
- An approved third party, such as an employer relocation program
At closing, the buydown dollars are typically deposited into a lender-controlled account. During months 1 through 24, the lender applies monthly credits to reduce your payment. The mortgage note still shows the permanent rate and payment that begin in year 3.
Seller-funded buydowns are treated as seller concessions and must fit within program limits for your loan type. Exact allowable percentages vary by loan program and lender overlays. Always confirm the maximum seller concessions with your lender before you negotiate.
Underwriting and qualification
Qualification rules affect your approval and price point, so get clarity early.
- Some lenders qualify you at the permanent note rate. In that case, the buydown does not increase your qualifying loan amount.
- Others may use an investor-specific qualifying rate. Policies vary by lender and loan program.
- Lenders must document the source of funds for the buydown. Gifts or third-party funds often require specific documentation.
Your ability to close, your purchase price, and your negotiation strategy depend on how your lender qualifies you. Ask for written confirmation.
Pros and cons for Denver buyers
Pros
- Immediate payment relief. Lower payments in years 1 and 2 can relieve budget pressure while you settle in, ramp income, or absorb new-home expenses.
- Potential qualification help. If your lender uses a lower qualifying rate, a buydown can expand buying power.
- Negotiation tool. In markets where sellers offer concessions, a buydown can be a cleaner win than broad price cuts.
- Straightforward setup. The structure is easy to document and does not permanently change your loan terms.
Cons
- Real cost. The subsidy is paid upfront by someone. Depending on how long you keep the loan, buying permanent points might save more interest over time.
- Payment jump in year 3. Budget for the permanent payment. Test your comfort at that level now.
- Market dependence. In a strong seller’s market, sellers may be less willing to fund buydowns.
- Concession limits. Buydown dollars count against seller concession caps and may compete with other credits.
When a 2-1 buydown makes sense in Denver
A 2-1 buydown often fits if you expect income increases in the next 12 to 24 months, you are transitioning households, or you want to secure a home now with near-term payment relief. Move-up buyers sometimes use a buydown to manage cash flow while selling another property or settling into a new neighborhood.
Denver’s home prices and interest-rate sensitivity make short-term affordability tools attractive, especially when inventory levels support seller concessions. If you plan to hold the loan for only a few years, a temporary buydown can be efficient. If you expect to keep the loan long term, compare the cost of a temporary buydown to permanent discount points.
Your next steps
- Talk to at least one local lender before you shop.
- Confirm they allow 2-1 buydowns for your loan type, such as conventional, FHA, or VA.
- Ask at what rate they will qualify your debt-to-income: permanent note rate or a lower qualifying rate.
- Request a written estimate showing the permanent payment, year-1 and year-2 payments, and the exact subsidy dollars required.
- Plan your offer strategy.
- If you want the seller to fund the buydown, include it in the contract with a clear dollar amount and instructions to deposit at closing per lender requirements.
- Verify seller concession limits for your down payment and loan program before you write the offer.
- Budget beyond year 2.
- Stress test your budget for the permanent payment starting in year 3, plus potential increases in taxes, insurance, and HOA dues.
- Confirm escrow handling and disclosures.
- Ask your lender where the funds will be held, how monthly credits appear, and how the payment schedule will be shown on your Closing Disclosure.
- Compare alternatives.
- Price out permanent points versus a 2-1 buydown. Decide based on your time horizon and likelihood of refinancing.
Questions to ask your lender
- Do you allow seller or third-party funded 2-1 buydowns for my loan type?
- At what interest rate will you qualify my income and DTI?
- How much money is required to fund the buydown for my specific loan scenario?
- Are there any lender fees or reserve requirements connected to a buydown?
- How will the buydown appear on my Loan Estimate and Closing Disclosure?
- What are the maximum seller concessions for my down payment and program, and how should we write the contract language?
Contract tips for seller-funded buydowns
Precision matters. Work with your agent and lender to align the purchase contract with lender requirements. A clear clause could say something like: “Seller to deposit $_____ at closing to fund a 2-1 temporary interest rate buydown per lender instructions.” Make sure the lender approves the structure, the title company understands the deposit, and the amount fits within concession limits for your program.
Compare a 2-1 buydown to paying points
A temporary buydown lowers your rate for 24 months. Discount points lower your note rate for the entire term. If you expect to keep the loan many years, points may produce more total interest savings. If your horizon is 2 to 4 years or you anticipate refinancing, a 2-1 buydown can create the most value up front. Ask your lender for breakeven calculations for both options.
Final thoughts
A 2-1 buydown can be a smart, transparent way to lower your early payments in Denver, especially if the seller can fund it and your lender’s qualification approach aligns with your plan. The key is to see the full payment picture, confirm underwriting rules in writing, and capture the right contract language so nothing is left to chance at closing.
If you want help running numbers, pressure-testing your budget, and negotiating the right concession structure, we are here to guide you from strategy to keys in hand. Reach out to The Modglin Collection for a friendly consult and a clear plan.
FAQs
What is a 2-1 buydown on a Denver mortgage?
- A 2-1 buydown is a temporary subsidy that lowers your interest rate by 2 points in year 1 and 1 point in year 2, then your loan resets to the permanent note rate in year 3.
Who can pay for a 2-1 buydown in Denver home purchases?
- The seller, builder, lender, you or your family, or an approved third party can fund it, subject to program rules and documented sources of funds.
How does a 2-1 buydown affect loan qualification?
- Some lenders qualify you at the permanent note rate, while others may use a different qualifying rate, so you should confirm the policy with your lender early.
Are seller-funded buydowns limited by program rules?
- Yes, they count as seller concessions and must fall within the maximums for your loan type and down payment; verify the limits with your lender before negotiating.
What happens to my payment after the buydown ends?
- Starting in year 3 your payment increases to the permanent amount shown on your mortgage note and disclosures, so you should budget for that higher payment now.
