How 2-1 Buydowns Work In Wisconsin

Wish your mortgage payment could start lower while you settle into your new home? In Wisconsin, a 2-1 buydown can do exactly that by reducing your first two years of payments before they step up. If you are buying or selling in McFarland or greater Dane County, understanding how this tool works can help you negotiate smarter and plan your budget with confidence. In this guide, you will learn the mechanics, costs, who can pay, how lenders qualify you, and when a 2-1 buydown makes sense locally. Let’s dive in.

What is a 2-1 buydown

A 2-1 buydown is a temporary interest-rate subsidy on a fixed-rate loan. Your interest rate is reduced by 2 percentage points in year one and by 1 percentage point in year two. After month 24, your payment rises to the full note rate for the rest of the term.

The subsidy is usually paid as a lump sum at closing and placed into a buydown escrow account. Each month during the buydown period, the lender draws from that account to cover the difference between your reduced payment and the full contractual payment.

Who can pay and how funds flow

Several parties can fund a 2-1 buydown: the seller, a builder, the lender, or you as the buyer. In our area, seller-paid buydowns are often used as an incentive when buyers are rate sensitive or when a listing needs an extra edge. Builders may also offer buydowns to help sell new homes under construction.

At closing, the total subsidy for 24 months is collected and disclosed on the Closing Disclosure. The money is deposited into a buydown account, and the servicer applies it each month during the first two years. Your escrow for taxes and insurance is typically handled separately and is not reduced by a principal and interest buydown unless specifically included, which is rare.

How lenders qualify you

Many lenders qualify you based on the full note rate rather than the reduced buydown payment. That means you must be able to afford the permanent payment even though you pay less for the first two years. Some programs and lenders may allow qualification based on the reduced payments if the buydown funds are fully documented and deposited. Policies vary by loan type and lender overlays.

The best step is to ask your loan officer, in writing, how you will be qualified and to request a payment schedule that shows the reduced payments and the post-buydown payment. That keeps your expectations clear and your budget on track.

Payment example: $300,000 at 6 percent

Here is an illustrative example for a 30-year fixed loan of $300,000 with a 6.00 percent note rate:

• Note-rate monthly principal and interest: about $1,799.
• Year 1 at 4.00 percent: about $1,432, which saves about $367 per month.
• Year 2 at 5.00 percent: about $1,610, which saves about $189 per month.
• Total subsidy at closing: about $6,672 for the first 24 months.

This example covers principal and interest only. Escrows for taxes, insurance, and any mortgage insurance are separate. Actual numbers depend on your loan amount, term, and rates, so use your lender’s official calculations for your scenario.

Program rules and seller limits

Loan programs handle seller concessions differently, and those limits affect how much room you have to fund a buydown:

• Conventional loans typically cap seller concessions based on your down payment percentage. A common structure for primary residences is about 3 percent if you put less than 10 percent down, 6 percent for 10 to 25 percent down, and 9 percent for 25 percent or more down. Confirm exact limits with your lender.
• FHA generally allows seller contributions up to 6 percent of the purchase price. Seller-funded temporary buydowns are commonly permitted when properly documented.
• VA loans allow seller concessions with specific rules about what can be paid. Seller-funded buydowns are often used, subject to VA guidance and caps.
• USDA loans allow concessions for certain costs. Many lenders permit seller-funded buydowns with proper documentation.

Underwriting approaches vary across these programs and by investor. Always verify current guidelines and your lender’s policy before you rely on a buydown to qualify.

Closing and disclosures in Wisconsin

You will see the buydown amount and its funding source clearly disclosed on the Closing Disclosure. Your closing agent documents the agreement and how the servicer will apply the funds. After closing, you should receive a schedule that shows the months your payment is reduced and when it steps up.

If your loan pays off or you refinance before the buydown period ends, any remaining funds are handled under the servicer’s rules and the buydown agreement. Ask your lender or servicer how they handle unused funds in that situation so you know what to expect.

Pros, cons, and fit

A 2-1 buydown can be a smart tool, but it must match your plans and budget.

Pros:

• Lower first- and second-year payments improve near-term cash flow.
• Can make a listing more attractive when rates are elevated.
• Helpful if you expect income to rise or you plan to refinance or sell before the payment increases.

Cons:

• Your payment increases to the note-rate amount in year three, which can create payment shock if you do not prepare.
• It does not reduce your principal balance, loan-to-value, or private mortgage insurance calculations.
• Many lenders still qualify you at the note rate, so a buydown may not change your approval outcome.

A good fit is a buyer who can comfortably afford the post-buydown payment, has a realistic plan for income growth or future refinancing, and values lower payments during the first two years.

McFarland and Dane County tips

Inventory in the greater Madison area, including McFarland, has been tight at times, and pricing has been resilient. In competitive moments, buyers may need to lead with strong terms and flexibility. In softer pockets or for certain property types, seller incentives like a 2-1 buydown can help a listing stand out.

Local lenders and credit unions can differ on whether they will qualify you at the reduced payment or at the note rate. If you are considering a buydown, loop in a Dane County lender early and ask for written confirmation of their approach. Sellers should discuss the impact of a buydown on net proceeds and make sure the offer and closing documents capture the details accurately.

Buyer checklist

Use this quick list as you evaluate a 2-1 buydown in McFarland:

• Ask your lender whether you will be qualified at the note rate or the reduced buydown payment.
• Request a written schedule that shows payments for year one, year two, and the full payment afterward.
• Confirm how taxes, insurance escrows, and any mortgage insurance are handled.
• Stress test your budget against the full note-rate payment starting in year three.
• Discuss potential tax treatment with a tax advisor, especially if the seller funds the buydown.

Seller checklist

If you are selling and considering a buydown as an incentive, cover these steps:

• Confirm the buyer’s loan program and the applicable seller-concession limits.
• Ask your agent and closing team how to structure and disclose the buydown on the offer and Closing Disclosure.
• Calculate your net proceeds after funding the buydown so you know your true bottom line.
• Coordinate with the buyer’s lender to ensure the buydown funds and servicer instructions are in the closing package.

Common mistakes to avoid

• Assuming the reduced payment equals your qualification payment. Many lenders still use the note rate for underwriting.
• Forgetting that escrow items are separate. A P&I buydown does not lower property taxes or homeowner’s insurance.
• Overlooking the step-up. Plan now for the higher payment in year three.
• Skipping documentation. Make sure the buydown agreement, funding source, and schedule are in writing and included in closing documents.

When a 2-1 buydown makes the most sense

You may benefit if you need breathing room during your first two years of ownership, expect income growth, or plan to refinance if rates improve. Sellers often use buydowns to reach more buyers without cutting list price, especially for homes that are new to market or that need to re-capture attention after a price adjustment.

As your local advisor, we often see that the right financing structure can be the difference between a deal that works and one that stalls. A 2-1 buydown is one tool among many. The key is matching it to your goals, your cash position at closing, and your comfort with the future payment.

Your next step in McFarland

If you are exploring a 2-1 buydown for a McFarland purchase or want to position your listing with a compelling incentive, we can help you evaluate the numbers, coordinate with local lenders, and negotiate terms that fit your timeline. Our team’s approach is hands-on and detail oriented, so you stay informed from offer to closing.

Ready to run scenarios or craft an offer strategy that uses a buydown wisely? Reach out to us at Lessing Real Estate. We are here to help you move with clarity and confidence.

FAQs

What is a 2-1 buydown on a Wisconsin home loan

• A 2-1 buydown is a temporary subsidy that lowers your interest rate by 2 points in year one and 1 point in year two, then it returns to the original note rate.

Who can pay for a 2-1 buydown in McFarland transactions

• The seller, a builder, the lender, or the buyer can fund it, with the subsidy paid as a lump sum at closing and applied over the first 24 months.

How does lender qualification work with a 2-1 buydown

• Many lenders qualify you at the full note rate, not the reduced payment. Some may allow qualification at the reduced payment if the buydown is fully documented.

Does a 2-1 buydown reduce PMI or taxes and insurance

• No. A temporary buydown affects only principal and interest. Private mortgage insurance, taxes, and insurance are calculated separately and typically do not change.

What happens to unused buydown funds if I refinance early

• Any remaining funds are handled under the servicer’s rules and the buydown agreement. Ask your lender or servicer how they address early payoff or refinance.

Are seller-paid 2-1 buydowns allowed under common loan programs

• Yes, they are commonly permitted under Conventional, FHA, VA, and USDA programs, subject to seller-concession limits and proper documentation.