Two programs stand out when rates are near 7%: the temporary 2-1 buydown and the adjustable-rate mortgage (ARM). Both lower the monthly payment in the early years of the loan, but they do it in very different ways and carry different risks.
2-1 temporary buydown. A 2-1 buydown reduces the borrower’s payment rate by two percentage points in the first year and one point in the second year, then the loan settles at its full note rate from year three onward. The discount is paid for up front, usually by the seller or builder as a concession, and the money sits in an escrow account that covers the gap between the reduced payment and the full payment. On a $332,800 loan (a $416,000 home with 20% down) at a 7% note rate, the full principal-and-interest payment is about $2,214 a month. With a 2-1 buydown, the payment drops to roughly $1,787 in year one (at 5%) and $1,995 in year two (at 6%), saving the buyer about $7,750 over two years. The trade-off is that the relief is temporary. Buyers generally have to qualify at the full note rate, and the seller’s contribution counts toward the loan program’s concession limits. Buydowns are especially attractive in today’s buyer-leaning market, where sellers and builders are more willing to offer concessions, and buyers who expect rates to fall can refinance before the full payment kicks in.
Adjustable-rate mortgage. An ARM, such as a 5/6, 7/6, or 10/6 loan, offers a fixed rate for an initial period of 5, 7, or 10 years, after which the rate adjusts every six months based on an index (typically SOFR) plus a set margin. The initial rate is usually lower than a comparable 30-year fixed rate, so the payment is lower for the entire fixed period rather than just the first two years. That longer window makes an ARM appealing for buyers who expect to sell or refinance within that time frame. The main risk comes after the fixed period ends. If rates are higher then, the payment can rise, though rate caps limit how much it can increase at each adjustment and over the life of the loan. Lenders also often qualify ARM borrowers at a rate above the initial rate, especially on shorter fixed periods, to make sure they can handle a future increase.