Feeling priced out by today’s mortgage rates in Daly City? You are not alone. Many first-time buyers and trade-up families want a smart way to ease into payments without losing momentum on their home goals. Temporary rate buydowns can help you do that when they are set up correctly with your lender, agent, and escrow team.
In this guide, you will learn how 2-1 and 3-2-1 buydowns change your payment, who typically pays in San Mateo County, how seller credits are written into California contracts, and the key questions to ask before you write or accept an offer. Let’s dive in.
What is a rate buydown?
A temporary interest-rate buydown is a short-term payment reduction on a fixed-rate mortgage. A third party funds a lump sum at closing to subsidize part of your monthly payment for a set period. After the buydown ends, your payment returns to the permanent note rate shown on your loan.
You still have a fixed-rate loan. The buydown simply covers a portion of your early payments so you pay less each month during the buydown period.
2-1 and 3-2-1 explained
How payments change
The most common structures are:
- 2-1 buydown. Year 1 is 2 percentage points below your permanent rate. Year 2 is 1 point below. Year 3 and onward you pay the full note rate.
- 3-2-1 buydown. Year 1 is 3 points below the note rate. Year 2 is 2 points below. Year 3 is 1 point below. Year 4 and onward you pay the full note rate.
The subsidy provider deposits a lump sum at or before closing. During the buydown period, that account pays the difference between your reduced payment and the full note-rate payment each month.
Simple Daly City example
Here is a high-level illustration to show scale. Your lender will run exact numbers for your loan.
- Purchase price: $1,000,000
- Down payment: 10 percent. Loan amount: $900,000
- Permanent note rate: 6.00 percent, 30-year fixed
Approximate principal and interest payments:
- At 6.00 percent: about $5,401 per month
- 2-1 buydown year 1 at 4.00 percent: about $4,297 per month. Savings about $1,104 per month
- 2-1 buydown year 2 at 5.00 percent: about $4,829 per month. Savings about $571 per month
Estimated subsidy needed to fund this 2-1 buydown: roughly $20,100 total across the first two years. A 3-2-1 buydown creates deeper first-year savings and requires a larger total subsidy.
Important: lenders compute required deposits using their methods. Always ask for a written quote that shows payment by year and the dollar amount needed at closing.
Who pays in San Mateo County
- Sellers. On resale homes, sellers often fund buydowns as a negotiated concession. It can help a buyer’s monthly budget without changing the contract price.
- Builders or developers. New construction sometimes comes with a builder-funded buydown as an incentive.
- Buyers. You can self-fund a temporary buydown or pay permanent discount points. Ask your lender which option matches your goals.
- Lenders. Some lenders offer promotional credits, but all buydowns must follow investor and program rules.
How credits work in California
Writing it in the contract
In San Mateo County, buyers and sellers usually use C.A.R. forms. If you want a temporary buydown, the purchase agreement should show the exact dollar amount or a maximum seller credit and state the intended use. For example, temporary interest rate buydown or buyer’s closing costs.
Escrow and disbursement
The lender provides instructions for funding a buydown account. The seller’s funds are deposited into escrow, then held and disbursed to the lender monthly during the buydown period. The Closing Disclosure shows the seller credit and how funds are applied.
Program limits to know
Each loan program sets limits on seller concessions. Common guidelines include:
- Conventional loans. Fannie Mae and Freddie Mac allow different seller credit caps based on loan-to-value. A common rule of thumb is about 3 percent at higher LTVs, 6 percent at mid LTVs, and up to 9 percent at lower LTVs. Verify the exact thresholds with your lender.
- FHA loans. Seller contributions are commonly capped at 6 percent of the purchase price. Confirm program details for your case.
- VA loans. VA rules handle concessions differently. A commonly referenced limit is about 4 percent for typical concessions. Check specifics with a VA lender.
Even if a program allows a buydown, individual lenders may have overlays that further limit structures or amounts. Always confirm early with your loan officer.
Underwriting and closing
Qualifying at the note rate
Most lenders underwrite you at the permanent note rate, not the reduced temporary rate. You need to show you can afford the full payment after the buydown ends. This is the single most important qualification detail to confirm.
PMI and impounds
Mortgage insurance and escrowed taxes and insurance are typically based on the permanent rate and loan balance. Ask your lender how the temporary payment affects your total monthly outlay.
Timing and documents
Expect the lender to request documentation about the source of buydown funds and clear escrow instructions. Make sure the buydown amount and use are stated in the contract so the escrow company can show it on the final settlement statement.
Pros and cons
Benefits
- Immediate cash-flow relief during the first one to three years
- Flexibility for first-time buyers or families expecting higher income later
- For sellers, an effective incentive that preserves list price while supporting buyer affordability
Trade-offs
- Temporary only. Payments rise after the buydown period
- You usually must qualify at the permanent rate, so a buydown does not substitute for income approval
- Program caps and lender overlays can limit seller credits
- Tax treatment of third-party payments can be complex. Consult a tax professional
Local tips for Daly City
- Use buydowns strategically. In high-price Bay Area markets, a seller-funded buydown can be more attractive than a list price cut because it directly improves the buyer’s early monthly payment without changing the comps.
- Confirm the math in writing. Ask your lender for the exact buydown deposit, year-by-year payment schedule, and any effect on your rate lock, points, or lender credits.
- Coordinate the paperwork. Make sure your agent, lender, and escrow officer align on the contract language and disbursement instructions. This avoids delays at closing.
- Mind program limits. San Mateo County closing costs can already be significant. Ensure total seller credits do not exceed program caps.
Questions to ask your lender
- Will you underwrite me at the permanent note rate or the temporary rate? Please confirm in writing
- Do you allow 2-1 and 3-2-1 buydowns? Do you have any overlays or limits I should know about
- How do you calculate the exact buydown deposit at closing? Please provide a written quote that shows dollar amount and disbursement schedule
- Can seller funds pay for the buydown? Do you require any special documentation
- Does the buydown affect my mortgage insurance, escrow, or property tax impounds
- Will the buydown change my rate lock terms, points, or lender credits
- Are there tax implications I should discuss with a tax professional
Questions to ask your agent
- How should we phrase the seller credit in the C.A.R. purchase agreement and escrow instructions so the lender can process it
- Given recent local sales, is a temporary buydown more effective than a price reduction or traditional closing cost credit
- Which local escrow companies and lenders handle buydown accounts smoothly
- Who will prepare the buydown instruction letter for the lender and set the monthly subsidy schedule
- Will the concession have any practical effect on appraisal or financing contingencies
Make a game plan
If you are buying, get a lender quote that compares a buydown against paying points for a permanent rate reduction. See which option best matches your time horizon and income growth. If you are selling, price your home based on comps, then evaluate whether a targeted buydown concession would reach more qualified buyers than a price cut of the same cost. In both cases, align the contract language, escrow steps, and program limits before you negotiate.
Ready to explore a Daly City purchase or sale with a clear, numbers-forward plan? Connect with the local team that brings boutique care and strong negotiation to every step. Reach out to Next Gen Properties for a complimentary strategy session. We serve clients in English, Mandarin, and Cantonese.
FAQs
What is a temporary buydown vs. points
- A temporary buydown lowers your payment for one to three years using a funded subsidy, while discount points are paid to permanently reduce the note rate.
Can seller credits fund a buydown in Daly City
- Yes, seller-funded buydowns are common when written into the purchase agreement and processed through escrow with lender approval, subject to program limits and lender overlays.
How much does a 2-1 buydown cost on $900k
- In an example with a $900,000 loan at 6.00 percent, estimated funding is about $20,100 to cover the first two years of reduced payments. Your lender will provide exact figures.
Do I qualify using the reduced payment
- Most lenders qualify you at the permanent note rate, not the temporary reduced payment, so you must be able to afford the full payment after the buydown period.
Are buydowns allowed with FHA or VA loans
- Yes, but seller contributions are capped by program rules and may be treated differently. Confirm specific limits and structures with your lender early.
Will a buydown affect my appraisal or contingencies
- Concessions must be disclosed and can factor into underwriting. Your agent and lender will guide how credits are structured so the appraisal and financing process stays on track.
Are buydown payments tax deductible
- Tax treatment of third-party buydown payments varies. Speak with a qualified tax advisor about your situation before you rely on any deduction.
