What Is a 1-0 Buydown?

A 1-0 buydown is a type of temporary mortgage financing arrangement in which the borrower’s interest rate is reduced by 1 percentage point during the first year of the loan term. After the initial year, the interest rate reverts to the note rate for the remainder of the loan term. This structure is designed to ease the borrower into full mortgage payments by lowering the initial monthly payment, often as part of an incentive in a real estate transaction. The cost of the buydown is typically paid upfront by a party to the transaction, such as the seller, builder, or lender, in the form of a lump-sum payment into a buydown escrow account.

How a 1-0 Buydown Works

In a 1-0 buydown, the mortgage rate is artificially reduced by 1% for the first year through a prepaid subsidy. The borrower still qualifies based on the full, permanent interest rate, also known as the note rate, but the initial monthly payments are based on the lower, discounted rate. After the first year, the subsidy ends, and the borrower begins paying the full rate for the remainder of the loan’s life.

For example, if a borrower takes out a 30-year fixed-rate mortgage at a 7% note rate, the buydown would reduce the effective interest rate to 6% for the first year. During that year, the borrower's payments would be calculated based on the 6% rate, resulting in lower monthly costs. Beginning in year two, the rate reverts to 7%, and the borrower continues to pay based on that rate until the loan is paid off or refinanced.

Purpose and Appeal

The 1-0 buydown is often used in real estate markets where sellers or builders are motivated to attract buyers without lowering the purchase price. By offering a temporary reduction in the borrower’s monthly obligation, the buydown can make a property more affordable in the short term and help ease the transition into homeownership. This structure can be especially appealing to first-time homebuyers or individuals expecting future income growth that would make higher payments more manageable later on.

While the buydown reduces the initial monthly burden, it does not lower the total loan amount or the note rate used to qualify the borrower. This is important because the lender will still evaluate the borrower's ability to repay the loan based on the full interest rate that will apply after the first year.

Funding the Buydown

The cost of a 1-0 buydown must be covered upfront and is typically calculated as the difference in interest payments between the reduced rate and the full note rate during the buydown period. This amount is usually deposited into a buydown escrow account at closing and is used to supplement the borrower’s monthly payments during the first year.

The source of the funds can vary. In many cases, sellers or builders pay for the buydown as a sales concession. Lenders may also offer buydowns as promotional tools, especially in high-rate environments. In rare instances, borrowers themselves may choose to pay the buydown cost if it fits into their financial strategy, though temporary buydowns are generally more common when funded by third parties.

Comparison to Permanent Buydowns

A 1-0 buydown differs from a permanent buydown, in which the borrower pays discount points to reduce the interest rate for the entire life of the loan. Permanent buydowns require a larger upfront payment but provide long-term savings through reduced interest costs. In contrast, a 1-0 buydown offers short-term relief but no long-term reduction in the loan’s interest rate or total interest paid.

Borrowers should evaluate both options based on their expected time in the home, cash flow constraints, and likelihood of refinancing. While permanent buydowns may be more cost-effective for long-term borrowers, temporary buydowns like the 1-0 structure can provide helpful payment relief in the early years of the mortgage.

Risks and Considerations

Although a 1-0 buydown can ease early payment obligations, borrowers must be prepared for the payment increase after the first year. This transition can be a financial shock if not anticipated. It’s essential for borrowers to understand that the full monthly payment at the note rate is inevitable and should be affordable based on their long-term budget.

Additionally, because the buydown cost is prepaid, it can be wasted if the borrower refinances or sells the home before the first year ends. In such cases, the unused portion of the escrowed funds may not be refunded, depending on the lender’s policies.

Finally, not all lenders or loan programs allow temporary buydowns. They may be limited to certain types of conventional loans, FHA or VA loans, and subject to investor or agency guidelines. Borrowers should confirm eligibility with their loan officer before structuring a buydown into their financing.

The Bottom Line

A 1-0 buydown is a temporary interest rate reduction tool that lowers the borrower’s monthly mortgage payment by one percentage point in the first year before reverting to the standard note rate. Often funded by sellers or builders, it can be used to make a mortgage more accessible during the early stages of ownership. While it offers immediate relief, it does not reduce the overall cost of the loan in the long term and requires careful planning to ensure future affordability. Borrowers should weigh the short-term benefits against potential long-term consequences and consider whether it aligns with their broader financial situation.