Are rising rates making your monthly payment feel just out of reach? You are not alone. Many Tempe buyers and sellers are weighing 2‑1 buydowns and permanent rate buydowns to make payments more comfortable and deals easier to close. In this guide, you will learn how each option works in Arizona, what it really costs, how lenders underwrite them, and when each strategy makes sense in Tempe and greater Maricopa County. Let’s dive in.
What each buydown means
2‑1 buydown (temporary)
- Your rate is reduced by about 2 percentage points in year 1 and 1 point in year 2, then returns to the contract rate in year 3 for the rest of the loan.
- A lump sum paid at closing funds the monthly subsidy. The money is typically deposited into an escrow or reserve account and applied to your payment each month during the buydown period.
- Often paid by a seller or builder as an incentive, but a buyer can fund it too.
Permanent buydown (points)
- You pay mortgage points at closing to reduce the interest rate for the entire loan term. One point equals 1% of the loan amount.
- The rate reduction per point varies by lender and market conditions.
- Best suited if you plan to hold the loan long term and have cash at closing.
How lenders underwrite in Arizona
- Qualification rate: Many lenders qualify you at the full note rate, not the reduced 2‑1 payment. Some may allow qualification at the reduced payment if the buydown is funded by an allowable third party and documentation meets investor guidelines. Policies vary.
- Program limits: Conventional, FHA, VA, and USDA loans allow seller contributions within specific limits that depend on down payment and occupancy. Always confirm the allowable percentage for your loan type before you negotiate.
- Escrow and disclosure: Temporary buydown funds are typically placed in a designated escrow or trust account at closing. The structure, source of funds, and payment schedule must appear on your Loan Estimate and Closing Disclosure. Arizona title and escrow companies handle these logistics as part of the standard closing process.
Costs and break‑even: a simple Tempe example
Below is a hypothetical illustration to show the math. Your actual pricing and savings will differ based on market rates and lender pricing.
Assumptions:
- Loan amount: $400,000, 30‑year fixed
- Contract (note) rate: 6.5%
- Estimated principal and interest at 6.5%: about $2,529 per month
2‑1 buydown example
- Year 1 at 4.5%: about $2,026 per month
- Year 2 at 5.5%: about $2,272 per month
- Year 3+ at 6.5%: about $2,529 per month
- Upfront cost to fund the 2‑1 escrow: difference between the note‑rate payment and the reduced payments over 24 months.
- Year 1 savings: about $503 per month x 12 = $6,036
- Year 2 savings: about $257 per month x 12 = $3,084
- Total 2‑year subsidy: about $9,120
What it means: If a seller funds the buydown, you get roughly $9,120 of payment relief in the first 24 months. If you fund it yourself, you are essentially prepaying that relief at closing.
Permanent buydown example
- Assume 2 points reduce the rate from 6.5% to 6.0%.
- Cost at closing: 2% of $400,000 = $8,000
- New monthly principal and interest at 6.0%: about $2,398
- Monthly savings vs 6.5%: about $131
- Break‑even time: $8,000 divided by $131 is roughly 61 months, a little over 5 years.
What it means: If you expect to keep the loan longer than 5 years, a permanent buydown can deliver more total savings. If you plan to move or refinance sooner, the 2‑1 buydown usually provides more relief per dollar in the early years.
Quick decision guide
- Short‑term horizon or income expected to rise soon: 2‑1 buydown favors cash flow in the first 24 months.
- Long‑term hold with stable plans: Permanent buydown lowers the payment for the entire term and can reduce total interest paid.
- Unsure: Price both options with your lender and compare cumulative payments at 1, 2, 5, and 10 years.
When each option fits in Tempe
- Market tone: In slower segments of Tempe and wider Maricopa County, sellers and builders may be more open to funding buydowns. In faster pockets, a seller‑paid incentive may be less common.
- HOA and taxes: Include total PITI plus HOA dues when you evaluate savings. A lower rate or temporary subsidy will not change taxes or HOA amounts.
- Investors: A 2‑1 may help near‑term cash flow. A permanent buydown can improve long‑term yield if you plan to hold the asset.
- Appraisals: A buydown does not change appraised value. If the property is near a price ceiling, a buydown will not fix value constraints.
Who pays and how to negotiate
- Allowed payers: Buyer, seller, or builder can fund a buydown, subject to loan program limits and lender approval.
- Contract clarity: Put clear language in the purchase agreement specifying who pays, the dollar amount or percentage, and whether the funds are for a temporary buydown escrow or permanent points.
- Lender check: Confirm with your lender, in writing, that the structure is acceptable, how you will be qualified, and how the credit will appear on the Closing Disclosure.
- Marketing angle for sellers: A seller‑paid buydown can make your listing’s monthly payment more attractive to buyers compared to a similar‑sized price reduction, while preserving headline price.
Risks and fine print to consider
- Underwriting mismatch: Do not assume a temporary buydown will be used to qualify. Many lenders still underwrite at the note rate.
- Fund handling: Make sure the buydown funds are correctly deposited into the proper escrow or trust account at closing to avoid payment surprises.
- Rate locks: Permanent points are tied to rate locks. Market movement can change how many points are needed for a target rate.
- Prepayment or refinance: If you refinance, you may not recover prepaid points. Understand how your lender services unused temporary buydown funds if you pay off early.
Taxes at a glance
- Permanent points: Points are generally prepaid interest. Depending on IRS rules and how they are paid, some or all may be deductible in the year of purchase or amortized over time.
- Temporary buydown: The subsidy is usually treated differently than prepaid interest. Do not assume it is deductible the same way points are.
- Always consult a qualified tax professional for advice based on your situation.
Your next steps in Tempe and Maricopa County
- Price both options: Ask your lender to quote a 2‑1 buydown and several permanent buydown scenarios, including the exact points and the qualifying rate used.
- Confirm limits: Verify allowable seller contributions for your loan type and down payment.
- Check title logistics: Ask your escrow officer how temporary buydown funds appear on closing documents and how they are disbursed.
- Run the math: Compare cumulative costs at 1, 2, 5, and 10 years, including PITI and HOA.
If you want help structuring a clean offer or positioning your Tempe listing with the right incentive, reach out to Celina Acosta for a local, numbers‑first strategy. Se habla español.
FAQs
What is a 2‑1 buydown in Arizona?
- A 2‑1 buydown is a temporary payment subsidy that lowers your rate by about 2 points in year 1 and 1 point in year 2, then returns to the contract rate for the remaining term.
How do permanent buydown points work for Tempe buyers?
- You pay points at closing to permanently reduce the interest rate, which lowers your monthly payment for the life of the loan and can save total interest over time.
Will a 2‑1 buydown help me qualify for a mortgage?
- Possibly, but many lenders qualify at the full note rate; some allow reduced‑payment qualification if the buydown is funded by an allowable third party and documented properly.
Who can pay for a buydown in Maricopa County?
- Buyer, seller, or builder can pay, subject to program limits on seller concessions and lender-specific acceptance.
Is a seller‑paid buydown better than a price reduction?
- It depends on goals: a buydown can make monthly payments more attractive right away, while a price reduction affects long‑term loan balance but may deliver less visible monthly relief.
How are temporary buydown funds handled at Arizona closings?
- Funds are typically placed into a designated escrow or trust account at closing and applied monthly to subsidize payments, with the arrangement disclosed on closing documents.
