Buying in Millbrae can feel like a stretch, especially when rates push monthly payments higher than you expect. If you want some early breathing room without giving up your ideal location near Caltrain or BART, a 2-1 buydown could help. In this guide, you will learn what a 2-1 buydown is, how the numbers work, who typically pays for it, and how it compares with permanent points or a price reduction. You will also get practical steps and a checklist you can use with your lender and agent. Let’s dive in.
What a 2-1 buydown is
A 2-1 buydown is a temporary interest rate subsidy on a fixed-rate mortgage. Your rate is reduced by 2 percentage points in the first year and 1 percentage point in the second year. From year three on, you pay the full note rate.
The reduced payments are funded up front by a third party or by you at closing. The funds are placed in a special account and applied monthly to make up the difference between your lower temporary payment and the full payment. Think of it as prepaid interest spread over the first two years.
Common payers include the seller, a builder, or the lender. Sometimes buyers choose to fund it themselves, but many Millbrae buyers aim to negotiate a seller-paid buydown to conserve cash.
How a 2-1 buydown changes payments
Here is the standard schedule on a 30-year fixed loan:
- Year 1: note rate minus 2.00%
- Year 2: note rate minus 1.00%
- Year 3 and beyond: full note rate
The buydown affects principal and interest only. You still need to budget for property taxes, homeowners insurance, mortgage insurance if applicable, and HOA dues. Your actual total monthly payment includes those items.
Illustrative Millbrae scenario
Below is an illustrative example to show the math. It is not a quote.
- Purchase price: $1,200,000
- Down payment: 20%
- Loan amount: $960,000
- Note rate: 6.50% (30-year fixed)
Estimated monthly principal and interest (P&I):
- Year 1 at 4.50%: about $4,867 per month
- Year 2 at 5.50%: about $5,452 per month
- Year 3+ at 6.50%: about $6,067 per month
Estimated monthly savings:
- Year 1: about $1,200 per month (roughly $14,400 for the year)
- Year 2: about $615 per month (roughly $7,380 for the year)
- Total two-year subsidy: about $21,780
In many cases, the payer (often the seller) funds a lump sum at closing that equals the expected two-year payment difference. Actual lender calculations vary, and some lenders discount to present value.
Who pays and how funds flow
- The buydown funds are paid at closing and placed in an escrow or buydown account.
- Each month in the first two years, the servicer uses those funds to cover the gap between the reduced payment and the full payment.
- The arrangement is disclosed on the Closing Disclosure and typically recorded as a seller concession when the seller funds it.
This structure can appeal to Millbrae sellers who want to keep the contract price intact for appraisal and comparable sales, while offering buyers meaningful short-term payment relief.
Underwriting and qualification basics
- Qualifying rate: Many lenders underwrite using the full note rate, not the lower temporary rate. That means you may still need to qualify at the higher payment you will pay starting in year three. Some programs may allow qualification using the reduced payment, but this is lender- and investor-specific.
- What changes in your payment: The buydown reduces only interest, not taxes, insurance, or HOA dues.
- Documentation: Your lender will require clear documentation on who is paying for the buydown and the total amount.
- Program rules: Conventional, FHA, VA, and other programs have rules for seller concessions and buydown eligibility. Your lender should confirm current guidelines and any limits that apply.
When it makes sense in Millbrae
San Mateo County’s high prices make monthly cash flow a key concern. If you value Millbrae’s transit access and choose to stretch for the right home, a 2-1 buydown can offer relief in the first two years.
You may be a good fit if:
- You expect income growth from bonuses, raises, or starting rental income.
- You have a short-term horizon, planning to move or refinance within 2 to 4 years.
- You are buying a home where the seller prefers concessions over a price cut to protect comps.
- Your lender will allow the loan if qualifying must happen at the note rate.
It may not be the best choice if:
- You plan to stay long-term and can benefit more from permanent rate reductions.
- You cannot qualify at the full note rate and your lender will not use the reduced payment for qualification.
- A lower purchase price would better support your long-term goals, including your property tax basis and loan amount.
2-1 buydown vs. points vs. price reduction
Here is a simple way to compare your options:
Temporary 2-1 buydown
- Pros: Strong near-term payment relief; often seller-funded without reducing price; helpful bridge if you expect higher income soon.
- Cons: Payments step up in year two and again in year three; many lenders qualify at the full rate; does not reduce purchase price or tax basis.
Permanent buydown (discount points)
- Pros: Lowers your rate for the entire loan term; best if you will keep the loan long enough to pass breakeven.
- Cons: Higher upfront cost; not ideal if you plan to sell or refinance soon.
Price reduction
- Pros: Reduces the purchase price, which lowers your loan amount, interest paid over time, and can affect your property tax basis.
- Cons: Sellers may resist cuts that impact comps and appraisals; the monthly savings from a modest price cut may be smaller than a 2-1 buydown’s first-year savings.
A quick way to frame it: a buydown focuses savings in the first two years, while points or a price reduction spread savings over the entire life of the loan. Your time horizon drives which option pencils out.
How to structure your offer
- Name the credit clearly: Ask for a seller-paid 2-1 buydown credit, either as a specific dollar amount or a percentage of the price, to fund prepaid interest.
- Tie it to lender approval: Make the credit subject to lender acceptance and program rules so underwriting does not derail your plan.
- Protect comps where needed: In competitive settings, a buydown can be more attractive to the seller than a price cut since it keeps the contract price unchanged.
- Coordinate with escrow and title: Ensure the buydown is itemized on the Closing Disclosure and that escrow has correct instructions for the account.
Step-by-step: Estimate your buydown cost
Use this simple process to size the credit you might request:
- Identify your loan amount, note rate, and term.
- Compute the full monthly P&I at the note rate using a standard mortgage calculator.
- Compute P&I with the year one rate (note rate minus 2%) and the year two rate (note rate minus 1%).
- Subtract each reduced payment from the full payment to find the monthly subsidy for each month.
- Sum the first 24 months to estimate the total buydown funds needed. Lenders may discount to present value, so ask your loan officer for the exact lump sum.
- Compare that total to the cost of permanent points and to a possible price reduction. A breakeven view will show which option best fits your timeline.
Lender checklist for Millbrae buyers
Bring these questions to your loan officer before you write an offer:
- Will this loan product allow a 2-1 buydown?
- How will you calculate the lump-sum buydown amount?
- Who can provide the funds in this program (seller, builder, lender)?
- Will underwriting qualify me at the note rate or the reduced payment?
- What documentation do you need in the purchase contract and for the Closing Disclosure?
- How will mortgage insurance, escrow, and impounds be handled during the buydown period?
Local take: Why Millbrae buyers consider buydowns
Millbrae and nearby Peninsula cities offer strong transit access and quality-of-life convenience that many buyers value. In a market where list prices and comps matter, seller-paid buydowns can bridge the gap between what a buyer can comfortably pay today and the home they want for the long term. If you expect your income to grow, or you plan to refinance within a few years, a 2-1 buydown can set you up to land the right home now while smoothing the first two years of ownership.
Ready to run the numbers on a specific Millbrae home and compare a 2-1 buydown with points and a price reduction? Reach out for a tailored scenario and negotiation plan that fits your goals. Connect with Nick Villanueva to get started.
FAQs
What is a 2-1 buydown on a mortgage?
- It is a temporary subsidy that lowers your interest rate by 2 percentage points in year one and 1 point in year two, then returns to the full note rate in year three.
How much does a seller-funded 2-1 buydown cost?
- The cost is the sum of the first two years’ payment differences. In the example loan of $960,000 at a 6.50% note rate, the total is about $21,780, though lenders may calculate slightly differently.
Do lenders qualify me at the reduced buydown payment?
- Many lenders qualify you at the full note rate, not the temporary rates. Some programs may allow exceptions, so ask your loan officer how your loan will be underwritten.
Does a 2-1 buydown change my taxes or insurance?
- No. The buydown reduces only principal and interest. You still pay property taxes, homeowners insurance, mortgage insurance if required, and any HOA dues.
Is a price reduction better than a 2-1 buydown in Millbrae?
- It depends on your timeline. A price reduction lowers your loan amount and payments for the life of the loan. A 2-1 buydown delivers larger savings in the first two years. Use a breakeven comparison to decide.
Who can pay for the 2-1 buydown?
- Common payers are the seller, a builder, or the lender. Buyers can fund it too, but many aim to negotiate a seller credit as part of the offer.
