I went into this expecting the buydowns to win. Much to my surprise, they didn't.

I asked my preferred lender to price every financing option available in September 2026, then ran the math on a hypothetical $500,000 loan. The 1-0, 2-1 and 3-2-1 temporary buydowns sound like a great deal, but they mostly hand back what they cost. They prepay part of your payment for one to three years and never change the loan's actual rate.

When I lined up the 2-1 buydown vs ARM options, a 5/1 ARM lowered the payment from day one at no extra cost and came out ahead of every buydown over the first five years. And when a seller is offering money, a price reduction or closing-cost credit paired with that ARM beat every other combination I tested.

I'm Mike Gold with RE/MAX Alliance, and I help buyers across Erie, Lafayette, Louisville, Broomfield and Superior. Here's the full breakdown so you can see exactly where the money goes.

What a 2-1 Buydown Actually Does (and Doesn't Do)

A 2-1 buydown is a pile of cash, usually from the seller, that's set aside at closing. Each month, part of it covers the gap between your full payment and a reduced one. In year one your payment is figured at 2% below the note rate, in year two at 1% below, and from year three on you pay the full amount.

In my example, the 2-1 buydown cost $12,500 and delivered about $11,786 of payment help. In other words, the seller's money comes back to you in monthly slices, and then it's gone. Your loan's rate is still 7.25% on day one and on day 1,000.

The 1-0 and 3-2-1 versions work the same way. With standard pricing, the 1-0 costs roughly the same $3,990 it hands back, and the 3-2-1 costs $22,500 to deliver about $23,200 of help. Every one of them is close to a wash.

You still qualify at the full rate

A buydown doesn't make a bigger house affordable on paper. Under Fannie Mae's guidelines for temporary buydowns, lenders qualify you at the note rate, not the discounted first-year rate. That's the tradeoff most buyers don't hear about until they're in underwriting.

2-1 Buydown vs ARM: The Math on a $500,000 Loan

Here's every option side by side. Payments are principal and interest only, before taxes, insurance and HOA dues.

Hypothetical example based on one lender's September 2026 pricing. Not an offer of credit. Payments exclude taxes, insurance and HOA dues.

Look at what the ARM does. It knocks about $168 off the monthly payment starting with the first one, it keeps doing that for five years, and nobody has to pay for it upfront.

The buydowns front-load their help and then disappear. For example, the 2-1 feels great in year one, but by year three you're paying the full $3,411 while the ARM borrower is still at $3,243.

The 7/1 ARM is the middle ground

If five years feels too short, the 7/1 ARM gave up a little savings in exchange for two more years of a fixed rate. For buyers who aren't sure how long they'll stay, that extra runway can be worth more than the difference in payment.

Why Points Rarely Pay Off for Short-Term Owners

Points are different from a buydown because they lower your rate for the life of the loan. The question is whether you'll keep the loan long enough to earn the money back.

At this lender's pricing, one point (1% of the loan, or $5,000 here) cut the rate by about 0.125%. That saved about $41 a month. In other words, it takes roughly ten years of payments just to get your $5,000 back, and most buyers sell or refinance well before that.

The same $5,000 applied as a price reduction was worth roughly twice as much within three years. Point pricing varies a lot from lender to lender, so ask for the actual cost per point and the actual rate reduction before you decide.

The Best Way to Use a Seller Credit

Buyer negotiations often come down to one question: what should the seller's money be used for? I tested the same seller dollars several ways and measured where each buyer stood after three years compared with paying full price on the 7.25% fixed loan.

Hypothetical example. "Ahead" combines lower loan balance and lower payments. It isn't all interest savings.

Be clear on what those numbers mean. In the $10,000 price cut plus ARM scenario, about $10,000 of the $19,500 is debt you never borrowed and about $9,500 is interest you avoided, and the ARM's lower rate drives a big share of that second number.

The pattern still holds. Seller money did the most good when it reduced what I borrowed or covered cash I'd otherwise bring to closing, and the least good when it bought points. Loan programs cap how much a seller can contribute, so ask your lender where your limit sits before you write the offer.

If you're the seller

Sellers in Erie, Lafayette and Broomfield often ask me whether to advertise a buydown or just adjust the price. Knowing which concession a buyer actually values more helps you spend the same dollars more effectively. You can see how I approach pricing and negotiation in my home selling process guide.

The ARM Tradeoff: What Happens After Year Five

A 5/1 ARM's rate is fixed for five years. After that it adjusts based on a market index, and it can go up or down. That's the tradeoff, and you shouldn't take the loan without understanding it.

Before you commit, ask your lender three things. How high can the rate go at the first adjustment, how high can it go over the life of the loan, and what would the payment be at that maximum? Then make sure your budget can handle that number, not just the starting payment.

Also ask how often it adjusts after the fixed period. Many ARMs today reset every six months rather than once a year, even when people still call them "5/1" loans. The CFPB's consumer handbook on adjustable-rate mortgages walks through caps and adjustments in plain language.

An ARM tends to fit buyers who expect to move or refinance within five to seven years and who can absorb the worst-case payment if they don't. If you plan to stay put for fifteen years and hate uncertainty, a fixed rate may still be the right call, even if it costs more upfront.

FAQ

All figures are a hypothetical illustration based on one lender's pricing in September 2026 and aren't an offer or commitment to lend. Rates, payments, APR and costs vary by borrower, lender, loan program and market conditions. Mike Gold is a real estate broker with RE/MAX Alliance, not a mortgage lender. Talk with a licensed loan originator about your specific situation.