Temporary Rate Buydowns in California: 2-1 and 3-2-1 Explained

I’m Michael DiVita — DRE #01372066 | NMLS #241655, DiVita Home Finance (DRE #01818285 | NMLS #323700), Tiburon, CA. I’ve been in California mortgage lending since 2000 and founded DiVita Home Finance in 2007. I’m known as a creative mortgage broker: when a bank says no, I find the lender and the loan structure that can say yes. Call (800) 239-1103.

A temporary rate buydown lowers your mortgage payment for the first one to three years of the loan. Someone — usually the seller or builder — deposits money at closing into a buydown account, and that money covers part of each payment during the buydown period. After that, you pay the full note rate for the rest of the loan.

In a market where sellers are negotiating, a buydown is often worth more to a buyer than the same dollars taken off the price. Here’s how the common structures work, what they cost, and where the rules differ for conventional, FHA, VA, jumbo and non-QM loans.

Common Buydown Structures

The 3-2-1 is sometimes called a “3-1” buydown. It gives the biggest first-year reduction and three years of relief, and it costs roughly twice as much as a 2-1.

Example: 3-2-1 Buydown on a $900,000 Home

$720,000 loan (20% down), 30-year fixed, 7.0% note rate. Rates are illustrative.

Total subsidy over three years — and roughly what the seller would deposit at closing: about $33,000. A 2-1 buydown on the same loan costs about $16,800; a 1-0 about $5,700.

On a $1,600,000 jumbo loan at 7.25%, a 3-2-1 would save about $3,044, $2,080 and $1,063 a month in years 1–3, for a total cost of about $74,000.

Buydown vs. Price Reduction

Suppose a seller will give $32,000. As a price reduction on a purchase with 20% down, it lowers your loan by $25,600 — about $170 a month at 7.0%, for as long as you keep the loan. As a 3-2-1 buydown on a $700,000 loan at 7.0%, the same money cuts the payment by about $1,315, $899 and $460 a month in years 1–3, then nothing.

• The buydown wins if you expect to refinance or sell within a few years, or need the lower payment now.
• The price reduction wins if you plan to keep the loan long-term, want a lower property-tax basis, or need a lower loan amount to qualify. Remember you must qualify at the full note rate either way.
• Split it — a smaller price cut plus a 2-1 buydown is often an easy sell to a seller.

Buydown vs. Permanent Discount Points

Discount points lower your rate for the life of the loan; a temporary buydown lowers it for up to three years. If you’ll likely keep the loan well past year three, points often come out ahead. If you expect rates to fall and plan to refinance, the temporary buydown usually delivers more benefit up front. Unused buydown funds are handled according to the buydown agreement if you refinance or sell early — under Fannie Mae’s rules they go back to the borrower or lender as the agreement specifies, or are credited toward the payoff. I’ll show you the break-even for both before you negotiate.

The Rules by Loan Type

Conventional (Fannie Mae and Freddie Mac)

• Allowed on purchases of a principal residence or second home; not on investment properties or cash-out refinances.
• Maximum buydown period is three years, and the rate can rise no more than 1% per year — so a 3-2-1 is the largest standard structure.
• You must qualify at the full note rate.
• Seller- or builder-funded buydowns count toward interested-party contribution limits: 3% of price when your loan-to-value is over 90%, 6% at 75.01–90%, and 9% at 75% or less, for primary residences and second homes.

FHA

FHA allows temporary buydowns, with qualification at the note rate. Seller contributions on FHA loans are generally limited to 6% of the sales price, and the buydown counts toward that limit. Which structures are available (2-1 vs. 3-2-1) depends on FHA program rules and the lender, so I confirm before you write the offer. In 2026 the FHA loan limit for high-cost California counties is $1,249,125. See FHA loans in California.

VA

VA also allows temporary buydowns qualified at the note rate. A seller-paid buydown counts as a seller concession under VA’s 4% concession limit. See VA loans.

Jumbo

Jumbo loans are set by each lender. Many jumbo lenders don’t offer temporary buydowns; some allow a 2-1, and fewer allow a 3-2-1. Alternatives that often work better for Bay Area jumbo buyers: seller credits used for permanent discount points, or an adjustable-rate loan with a 7- or 10-year fixed period. I shop jumbo lenders that allow buydowns when it’s the right tool. See jumbo loans.

Bank Statement and Other Non-QM Loans

Some non-QM lenders allow buydowns on bank statement and other alternative-documentation loans; many don’t. Availability changes, so ask before you build an offer around one. See bank statement loans.

Who Pays for the Buydown?

• Seller — the most common, as a negotiated concession.
• Builder — new-construction incentives often include buydowns, sometimes tied to the builder’s preferred lender. Compare the total package.
• Lender — sometimes built into pricing.
• Buyer — allowed, but paying for your own temporary buydown rarely beats buying permanent points.

Is a Buydown Right for You?

A buydown makes the most sense when a seller or builder is willing to contribute, you want a lower payment in the first years, and you can comfortably afford the full payment if rates don’t fall. Don’t count on a refinance: if rates stay flat, you’ll pay the full note rate from year 2, 3 or 4 onward — which is exactly why lenders qualify you at that rate.

Frequently Asked Questions

What is a 3-2-1 buydown?

A 3-2-1 buydown lowers your rate by 3% in year 1, 2% in year 2 and 1% in year 3, then the loan goes to the full note rate. It’s funded by a deposit at closing, usually from the seller or builder. It’s sometimes called a “3-1” buydown.

How much does a buydown cost?

It equals the total payment subsidy. On a $720,000 loan at 7.0%, a 3-2-1 costs about $33,000, a 2-1 about $16,800 and a 1-0 about $5,700. Exact cost depends on the loan amount and rate.

Do I qualify at the lower buydown rate?

No. Fannie Mae, Freddie Mac, FHA and VA all require you to qualify at the full note rate.

Can I do a buydown on a jumbo loan?

Sometimes. Jumbo rules are set by each lender; many don’t offer temporary buydowns, some allow a 2-1, and fewer allow a 3-2-1. Seller-paid permanent points or an ARM can be good alternatives.

How much can a seller contribute toward a buydown?

On conventional loans for a primary residence or second home: 3% of the price above 90% loan-to-value, 6% from 75.01–90%, and 9% at 75% or less. FHA generally allows up to 6%, and VA counts a seller-paid buydown toward its 4% concession limit.

What happens if I refinance before the buydown ends?

Remaining buydown funds are handled under the buydown agreement — typically returned to the borrower or lender as specified, or credited toward the payoff.

Related Resources

• California Mortgage Rates
• ARM vs. Fixed-Rate Mortgage
• Jumbo Loans in California
• FHA Loans in California
• Interest-Only Mortgages
• California Closing Costs
• Should I Buy Now or Wait?