2-1 Buydown

2-1 Buydown Loans Are Good For:

A 2-1 buydown is ideal for buyers who want lower mortgage payments during the first two years of their loan. It’s also a strong fit for those expecting future income growth, purchasing new construction, or using seller incentives to ease into home ownership.

How It Works

A 2-1 buydown is not a separate loan type. It is a financing feature added to a fixed-rate mortgage. The temporary lower payments are made possible through an upfront payment, often covered by the seller, builder, or lender.

• Year 1: The interest rate is reduced by 2%.
• Year 2: The interest rate is reduced by 1%.
• Year 3 and Beyond: The interest rate returns to the original rate.

For example, if the standard interest rate is 7%, the borrower would pay 5% in the first year, 6% in the second year, and 7% from the third year onward.

Benefits of a 2-1 Buydown

The buydown cost is typically paid by the seller, builder, or lender as a closing incentive.

• Lower Initial Payments: This structure allows for more affordable monthly payments during the first two years.
• Increased Affordability: It can help buyers qualify for larger loans or more expensive homes.
• Seller Incentive: Sellers may offer this option to attract buyers in a competitive market.

Considerations

• Temporary Relief: Payments will increase after two years, which could strain budgets if income does not rise accordingly.
• Upfront Costs: There may be additional fees to cover the reduced interest, which can affect overall costs.

Ideal Candidates

A 2-1 buydown is suitable for borrowers who expect their income to increase in the near future or those who plan to sell or refinance within a few years. It can also be beneficial for first-time home buyers looking for lower initial costs.